THE MOONDRA POST

Is Obama lucky or what?

2012-01-29T13:27:00.011-05:00

Posted by Shyam Moondra

Not long ago, bruising fights with the Congressional Republicans over the issues of national debt ceiling and deficit reduction left President Barack Obama’s approval rating in the dumpsters with questionable prospects for getting re-elected in November of this year. However, since then, Obama seems to have been blessed with a string of lucky breaks that may have considerably improved the odds in favor of his re-election.

First, the economy, which was floundering because of the headwinds caused by EU debt issues and gridlock in the Congress at home, now seemed to have unexpectedly bounced back with unemployment declining to 8.5%. This has pushed the stock market up close to its 52-week high. As a result, the American voters are now beginning to feel that Obama’s policies may finally be taking hold and happy days are ahead. The corporations with a cash hoard of $3 trillion are finally feeling confident enough to take risks and put some of that money to work. Given the inner resilience of American economy, it seems quite possible that the economic reports in the coming months would increasingly point to a robust recovery, just in time for the presidential election in November. The timing could not have been better.

Second, the FED Chairman Ben Bernanke, re-appointed by Obama to a second four-year term despite the loud calls from the Congress to remove him, has improved Obama’s chances of re-election by declaring that the interest rates would remain at the current low levels at least through 2014. Bernanke, by not ruling out QE3, has further given a boost to the financial markets. So far, the Republicans have not charged that Bernanke is politicizing the FED policies to help an incumbent president.

Third, the opposition is in disarray. Republican voters are proving to be the weirdest ever. First, they propelled Herman Cain to the top – a man who had no political experience, who has been accused of being a serial sexual harasser and a wife cheater, and who had no idea where Libya is located; did Republicans really want to put him in the oval office with his finger on the nuclear trigger? Now their new darling is Newt Gingrich, the former House Speaker, who used to be known in the Congress as a back-bencher bomb thrower, who got reprimanded by the Congress for corruption and influence peddling, who has been accused of being a serial wife cheater, and who pocketed taxpayers’ $1.6 million as a lobbyist for Freddie-Mac and then criticized the financial bailout (Gingrich claims that he was hired as a “historian”). Republicans, known for conservative family values, are embracing people like Cain and Gingrich? Go figure! If Gingrich were to somehow win the nomination, it’s hard to imagine that he will get many women votes in the general election. The most likely winner of the Republican primary, Gov. Mitt Romney, is not the strongest candidate Republican Party could have come up with. Recent revelation that in 2010 he paid less than 15% in income taxes makes him part of the problem and not the solution. He apparently paid less in taxes than Warren Buffett’s secretary did. Also, how he made his fortune is contentious; as a private equity investor he bought companies and made money by laying off people and getting help from the government in the form of pro-rich tax policies. Romney is the kind of people that are currently being targeted by the “Occupy Wall Street” protesters. Romney, by all accounts, is considered quite moderate and thus will fail to inspire the hard-core conservatives within the Republican Party. Romney’s health care plan, which he implemented in Massachusetts as the Governor there, has more similarities than dissimilarities with that of the Obama plan. His Mormon religion is also a put off to many Republican evangelical Christians. The Romney’s candidacy is unlikely to fire-up the Republican base and without a heavy turnout in the November election it’s highly unlikely that he could win.

Fourth, the Congressional Republicans, especially the House Republicans, have damaged the Republican brand by their extreme behavior on the issue of debt ceiling, which led to the downgrade pf the U.S. government securities, a first in the nation’s history. The Republican leaders have transformed the current Congress into a “Do Nothing” Congress which has baffled many Americans. The current Congress enjoys a record low approval rating of only 9% which is a fraction of the approval rating for Obama. Obama is expected to run against the “Do Nothing” Congress and easily prevail.

Fifth, Republicans have not helped themselves by appearing to be disrespectful to the office of the presidency. The photo showing Arizona Gov. Jan Brewer (R) pointing her finger into Obama’s face during a heated conversation on the tarmac at Phoenix when Obama landed there for a visit to Arizona, didn’t play well with many Americans. The House Speaker John Boehner’s unprecedented refusal to grant Obama’s request to address the joint session of Congress on his Jobs Bill and forcing Obama to re-schedule the speech made Boehner look petty and disrespectful to the president. Many observers believe that if Obama were a white man, these sorts of insults would have been unthinkable; there is an appearance of racism in how these white politicians have treated a black president.

Aside from improving economy and weak Republican candidates, Obama has many things going for him:

• Obama has built up a huge war chest, thanks to the campaign contributions pouring in from his supporters, big and small. Obama’s re-election campaign is expected to raise close to $1 billion, a record in the U.S. presidential elections. With that kind of money, Obama will instantly gain the upper hand in getting his populous message out.

• Obama's stellar performance as the Commander-in-Chief has completely neutralized the Republican favorite issue of national defense and security on which they usually mount their election campaigns. The fact that Obama got Osama bin Laden, who evaded President George W. Bush for years, firmed up Obama’s credentials on national security. Also, Obama kept his promises by winding down the unpopular war in Iraq and putting the withdrawal from Afghanistan on a fast track. His reliance on high-tech weapon systems such as drones is proving to be highly effective at a fraction of the cost of traditional warfare. Obama’s deft handling of the Arab Spring has won praise from Democrats and Republicans, and our allies. The last century belonged to our cross-Atlantic alliances; Obama's new initiative to focus on the Pacific region will set the stage for the next hundred years of prosperity with many of the highly populated emerging economies.

• Obama is hitting the issues with targeted constituents. For example, his moderate immigration proposals compared with harsh rhetoric coming from the Republican primary candidates bode well for his chances of winning the Latino votes in the crucial states of Florida, Arizona, and Texas. Obama’s proposals on cutting back federal funding for colleges that are not controlling the increases in tuition fee is getting good traction among the younger people who are expected to have a big turnout in November. Obama’s constant emphasis on reforming the tax code to make it more fair and equitable has a strong support among the voters of all parties.

• Obama’s personal qualities have been impeccable. Michelle Obama, one of the most effective First Ladies of modern times, has proven to be a strong asset. Obama’s family values and personal ethics appeal to the people from all walks of life. The Obamas have been particularly active in looking after the interests of the members of the U.S. armed forces and their families, which is appreciated by many people including conservatives.

To restore credibility, the Congress must go back to $4.5 trillion deficit reduction plan

2011-11-23T20:00:00.012-05:00

Posted by Shyam Moondra

If we had a law that automatically suspended the Congressional members without pay on grounds that they irritated the citizens beyond what would be considered normal, then this would be that moment. The failure of the Super Committee to come up with a paltry $1.2 trillion deficit reduction plan would be considered a valid trigger for putting the entire Congress on temporary suspension until they came to their senses.

It’s shocking to see how bad things have really gotten in the Congress. Democracy is about finding common ground; if elected officials can't engage in give-and-take, then the government would be at stand still, the problems wouldn’t get solved, and the people would be forced to suffer unnecessarily. The bi-partisan Super Committee knew that it was important to reach an agreement on a deficit reduction plan to avoid economic fallout that could lead us into another recession. Since their announcement last Monday on lack of agreement, the stock market has already declined by 5%. The Super Committee’s colossal failure has dampened the confidence of the investors in the government’s ability to solve major economic problems. Simply put, the Super Committee, and by extension the entire Congress, failed to fulfill its duty to the nation.

The House and Senate members need to put their own re-election or party interests aside and focus on doing what's right for the country. Rich people benefited the most under President George W. Bush, so what’s wrong in asking them to pay more in taxes to help reduce deficit? The deficit is too large to be fixed just by spending cuts; it's imperative that we also raise revenues. We can't cut spending too much at a time when economy is struggling; if we did, it would undoubtedly slowdown the economy and push the unemployment rate into double digits.

President Barack Obama and House Speaker John Boehner must go back to their original $4.5 trillion plan and take it from there. The market and country are looking for a big plan to inspire confidence. A $1.2 trillion plan would not make much difference and it will in fact send a negative message to the markets. I don’t think we can wait for another year to do this after the 2012 election; this issue must be tackled by the current Congress right now.

Here is my 10-point plan that should be considered:

1. Let the Bush tax cuts for the rich people (those who make more than $500,000 a year) expire at the end of 2012, but extend the Bush tax cuts for the rest of the people for four more years. A special temporary income tax surcharge for millionaires and billionaires should also be on the table.

2. Reform the tax code. First, eliminate most deductions for those who are making $500,000 or more. Second, eliminate all tax subsidies given to oil companies, hedge fund managers, drug companies, and rich farmers. Third, close all corporate tax loop-holes and shut-down tax-havens that make it possible for corporations to escape paying their fair share of taxes (when GE pays 0% or Google pays only 2% in taxes, that's not right).

3. Cut the defense budget by at least 10%.

4. Medicaid program is largely wasteful and there is a lot of fraud perpetrated by the service providers and patients. Just give a fixed lump-sum amount to the states and let them manage medical care for the poor. We need to ration this benefit rather than making it an open-ended entitlement.

5. Social Security and Medicare are like insurance polices; the government should not change the terms of those polices mid-stream. If we want to reform these programs, it should be done for those who are just entering the work-force and not for those who already paid into the plans. These programs didn't add to the deficit, so there is no need to make drastic changes for those who are already receiving benefits or those who have already paid the premiums but haven’t yet started receiving benefits. We can make some minor adjustments such as modifying the formula for calculating COLA for SS and slightly increasing the premiums and deductibles for Medicare. However, the eligibility age for benefits for these programs should not be increased.

6. Streamline government structure. Texas Gov. Rick Perry's suggestion to eliminate some agencies is a serious proposal worth exploring. For example, Interior, Energy, and EPA could be combined into one Department.

7. We are falling behind in education, so we need to invest more in that area to remain competitive in the global market place. It's ironic that we are spending more money on building prisons but reducing funding for education; that doesn’t sound like the right prescription for a promising future.

8. Cut down foreign aid budget to bare minimum. We can't afford to keep giving tens of billions of dollars of aid every year to Egypt, Pakistan, Israel, and others, especially at a time of financial crisis at home.

9. Ban pork-barrel spending, earmarks, etc. Most of this spending is wasteful and often done to benefit big campaign contributors, which breeds corruption.

10. Cut salaries and benefits of members/staff of Congress that are way too generous. The country is going through a rough time, so everybody should make sacrifices.

If Obama and Boehner hammer out a plan to reduce deficit by around $4.5 trillion over ten years, it would be viewed as very positive by the financial markets, it would remove uncertainty and thus facilitate new capital spending by corporations, and in a short period of two or three years we would see a vibrant economy with significant job creation. The American people are anxious to see strong leadership from Obama and Boehner and others in the Congress to get this done quickly.

Super-duper Committee up in smoke – Republicans stuck between a rock and a hard place

2011-11-20T20:47:00.006-05:00

Posted by Shyam Moondra

When President Barack Obama and House Speaker John Boehner couldn’t agree on a grand deficit reduction plan, which would have reduced deficit by $4.5 trillion over ten years, they kicked the can down to the Senate and House. When Congress couldn’t reach an agreement, they appointed a Super Committee, consisting of six Democrats and six Republicans evenly divided between the Senate and House, to come up with a plan to reduce deficit by $1.2 trillion over ten years which would then be voted up-or-down by the full Congress without any amendments or filibuster. And if they failed to agree on a plan, there would be automatic cuts in discretionary spending worth $1.2 trillion of which about $500 billion would be realized by slashing the defense budget.

As of now, it looks highly unlikely that the Super Committee would agree to any plan. This would represent a colossal failure on the part of Congress that had a record-low approval rating of just 9% going into the Super Committee deliberations. Last time, when Congress failed to agree on the debt ceiling plan, S&P reduced the rating of U.S. government securities from AAA to AA+ and the stock market crashed by over 1,000 points. This time, market may not react that badly because the expectations are so low from this “do nothing” Congress. Everyone knows that it would be a miracle if the Super Committee could somehow wave a magic wand and overcome political gridlock.

Republicans are insisting that the income tax cuts for the rich enacted by President George W. Bush be made permanent, which is, of course, vehemently opposed by Democrats. The Democrats argue that the rich benefited the most under Bush and, therefore, they should also share in the pain of balancing the budget. Republicans’ intransigence on the issue of tax increase is remarkable because an overwhelming majority of the voters, including many Republicans, in fact support the idea of making rich people pay more in taxes to bring down deficit. Unfortunately, many Congressional Republicans signed a pledge to not vote for any tax increases; this pledge was sought by a political organization, Americans for Tax Reform, which is funded mostly by wealthy individuals and foundations. Many Republicans understand that the current level of deficit and debt can’t be reduced just by spending cuts and that some tax increases would be necessary. However, they are afraid to speak up in favor of tax increases because they fear retaliation from Americans for Tax Reform which could jeopardize their chances of getting re-elected. Republicans are indeed stuck between a rock and a hard place.

Now it looks like the tough issues of budget deficit and debt wouldn’t be addressed until after the 2012 election. Republicans have put themselves in a Pandora box – they are resisting tax increases for the rich even in the face of strong support from many of their own constituents. It’s hard to see how Republicans could stand to gain in 2012 from their impractical position. Ultimately, it would now be up to the American people, who would have to vote wisely. In 2012, the voters must elect people who would listen to their constituents, be willing to compromise, and do what is best for the country, even in the face of threats of retaliation from a lobbyist organization.

Does a paltry 9% approval rating render the U.S. Congress as illegitimate?

2011-11-09T10:18:00.007-05:00

Posted by Shyam Moondra

The latest CBS News/New York Times opinion poll shows that the approval rating for the U.S. Congress is at an all-time low of just 9%. That means a whopping 91% of the American people don’t trust the Congress’ ability to make the right decisions. Under the democratic systems of many other countries, this level of lack of support for a government would have amounted to a “no confidence” vote and triggered immediate new elections. However, under our constitution, we are stuck with the political gridlock until November, 2012 at which time voters would have to decide who should lead the country going forward, especially in the House of Representatives. Last Sunday, on ABC’s This Week program, when asked to comment on the declining popularity of Congress, House Speaker John Boehner (R) said that Congress always had low approval ratings. Boehner's dismissive attitude seems to suggest that he doesn’t think the views of an overwhelming majority of Americans are all that relevant. And that means the business as usual until the new elections are held in 2012.

In yesterday’s local elections, Republicans suffered severe blows on their core issues. In Ohio, the voters overwhelmingly rejected a law curbing union bargaining rights for public employees. This result may be the first clear indication that voters may be growing disenchanted with the Tea Party-backed Republicans, who have advocated deep spending cuts and opposed tax increases. In Mississippi, the voters rejected a controversial amendment that would have defined life as beginning at conception. This amendment would have made it impossible to get an abortion in the state and hampered the ability to get the morning-after pill or birth control pills that destroy fertilized eggs. Disposing of unused fertilized eggs could also have become illegal, making in vitro fertilization treatments more difficult. These two voting results dealt a blow to the Republican establishment and point to a significant shift in the voter sentiment heading into the 2012 election season.

Just as European welfare state is causing upheaval in Europe, the pro-rich policies in the U.S. are leading to just as disastrous results. The gap between the rich and poor is widening and discontent among the population at large is increasing. In a recent Wall Street Journal poll, 60% of the respondents said that the current structure of the economy favors a small portion of the rich people over the rest of the population. And that is the basis of “Occupy Wall Street” protests that are now spreading across American cities and across continents. The Occupiers are saying that the gap between the rich and poor is real and it's a direct result of Republicans favoring the affluent people, who make generous campaign contributions to Republican candidates. The protesters believe that the future of America lies in making the middle-class, which accounts for two-third of economy, stronger.

Given the shift in the electorate sentiment, the Congress needs to do the following:

• Ban campaign contributions by corporations that are polluting our political system. Big money from big business is drowning out the voice of the ordinary citizens. Through their relentless lobbying efforts, the corrupt corporations are able to win special breaks often at the expense of consumers.

What we have is institutionalized corruption that allows Rep. Paul Ryan (R) to collect close to $1 million in campaign contributions from the insurance industry and then propose to dismantle Medicare forcing all elderly people to buy their insurance from private insurance companies, creating a profit bonanza for the insurers.

• Ban revolving door practices where former members of Congress and/or staff become lobbyists and corrupt our governmental system for personal gain.

• Increase taxes on rich individuals making $500,000 or more a year and impose an absolute minimum income tax rate (e.g., 25%) for all corporate income, including profits from overseas operations (no more off-shore tax havens). Republicans equate higher taxes to big government; however, it’s not a question of big government or small government; it’s a question of fairness. During the last two decades, the rich people and corporations, especially financial institutions through highly leveraged bets, did quite well and paid relatively low taxes (thanks to lower tax rates and tax loop-holes). During this period, the executive compensation went through the roof. So, overall, a relatively small percentage of the population did exceedingly well, while the middle-class and low-income people lost ground. We need to reform the tax code to make it fairer.

• Stop all corporate tax subsidies and special treatments given to oil companies, hedge fund managers, drug companies, and rich farmers.

• Impose limits on how much corporate CEOs can make (as a multiple of the lowest paid employee in the company). Ban golden parachutes accorded to executives, especially to those who were fired for non-performance or those who are retiring.

• Create an environment where corporations are induced to become more ethical via stricter enforcement of the laws against insider trading and manipulation by the SEC, CFTC, Federal Reserve Board, and FDIC.

The sooner we make these fundamental reforms, the better off we would be as a country. If we continue on the current Republican path of favoring the rich, this country will break-apart and we may even see protests turning violent.

President Herman Cain? Have Republican voters gone berserk?

2011-11-02T09:51:00.009-04:00

Posted by Shyam Moondra

In recent years, the voting record of Republicans has been mystifying. Here is their track record:

• First, they voted for right-wing ideologues like House Speaker John Boehner and House Majority Leader Eric Cantor who adopted the disastrous policy of “say no” to everything that Democratic President Barack Obama proposed, took inflexible position on the debt issue that resulted in the S&P downgrade of the U.S. government securities, and pursued a strategy of deliberately damaging the economy and driving up the unemployment rate with the expectation that a weakened economy would make it easier for them to win the presidency in 2012.

• Second, Republican voters embraced the members of the toxic Tea Party that openly advocated a default by the government on its debt which would have brought disastrous results for the global economy.

• And now, the Republican voters are rooting for an unlikely candidate, Herman Cain, who is currently leading the pack. Cain, a Black man, has no political experience (he already made several gaffes), has questionable background (recent reports suggest that he engaged in sexual misconduct), and has flip-flopped on the core Republican issue of abortion. And to top all that, in a bizarre campaign ad, his chief-of-staff is shown puffing away on a cigarette.

What the heck is going on? Why are Republican voters being so erratic and nonsensical? Today, the country is in a big fix largely because of how the Republican constituents voted and what the elected Republicans did. President George W. Bush and Republican Congress caused most of the current budget deficit and national debt by spending over $1 trillion on the unnecessary war in Iraq, by handing out $1 trillion worth of unnecessary tax cuts to the rich and tax subsidies to the corporations, and by relaxing regulations that led to the financial crisis requiring close to $1 trillion in bank bailouts.

Here is a winning strategy for Republican voters for the upcoming 2012 elections – exercise good judgment and elect better quality people who would fight for the middle-class and not for the rich campaign contributors. Republicans must elect people who are not hardcore ideologues and who are able to solve people's problems by reaching out to the opponents and making the necessary compromises.

Obama’s impressive use of brains over muscles

2011-10-23T16:41:00.008-04:00

Posted by Shyam Moondra

A year ago, it was unthinkable that the long sought Al Qaeda master-mind, Osama bin Laden, would be killed in a daring raid deep inside Pakistan by the U.S. Special Forces that used secret stealth helicopters unknown to the world. No one could imagine that a combination of effective diplomacy at the UN and surgical strikes by the U.S. and NATO forces would be enough to enable the Libyan revolutionaries to kill the brutal dictator, Muammar Gaddafi, and put Libya on a path to democracy. Who could have thought that the political and diplomatic support by President Barack Obama would be enough for the Egyptian people to oust the strongman, Hosni Mubarak, and for the Tunisians to depose their ruthless leader, Zine al-Abidine Ben Ali? It was an unexpected surprise when the U.S. military used a high-tech unmanned drone to get Anwar al-Awlaki, the dangerous Al Qaeda leader based in Yemen. In fact, American unmanned drone attacks have killed a score of other high-value targets in Pakistan, Afghanistan, and Yemen. What’s more impressive is that Obama got all of this done without using an overwhelming military force and at a cost of around $1 billion compared with over $1 trillion President George W. Bush spent on the wars in Iraq and Afghanistan.

From the above foreign successes, a few things become clear about Obama’s strategy:

• As a first step, Obama prefers to use diplomacy and political and economic means (e.g., sanctions) to bring about the desired changes. On Libya, Obama insisted that the Arab League first formally ask for help through the U.N. Obama then skillfully persuaded the major powers at the U.N. to start with economic sanctions followed by minimal force to protect the unarmed civilian protesters. In case of Egypt, Obama successfully leveraged the military-to-military relations between the U.S. and Egypt to dissuade the Egyptian generals from firing upon the unarmed protesters that eventually led to the downfall of Mubarak.

• Obama prefers multi-lateral approach as opposed to going alone as Bush initially did in Afghanistan and Iraq. Given our weakened financial situation at home, Obama is acutely aware that the U.S. can no longer be the world police.

• Obama keeps his options open and uses the military as a last resort, even in the face of criticism from the right-wing Republican hawks. For example, Obama was wise to ignore Sen. John McCain’s advice to put American forces on the ground in Libya. Obama correctly understood that the American people had absolutely no appetite for engaging in yet another costly war.

• Obama doesn’t feel the need to always have the U.S. in the lead. In Libya, he ordered the U.S. Air Force to initiate the early surgical strikes but then let the French and British forces takeover the operation. Obama’s willingness to lead from behind was brilliant; he got the job done at minimal cost without endangering the lives of American soldiers, while at the same time he let our allies shine in the limelight.

• Obama combines first-rate intelligence and smart technologies (e.g., unmanned drones, stealth helicopters, and laser bombs) to execute military campaigns cheaply and with minimum casualties.

• Obama seems to understand that raw military force in Muslim countries does more harm than good. He prefers to use military covertly in a subtle manner rather than in a more visible way such as deploying overwhelming heavy armored ground forces. The Islamic extremists can easily exploit heavy military presence on the ground by framing the U.S. as a country in war with the Islam.

• Obama uses patience as a virtue. Unlike Republican predecessors, Obama doesn’t shoot first and then ask questions. Bush was known to have the cow-boy mentality in dealing with international problems. Obama is very deliberate and he exhausts all political and economic means before resorting to force. In case of Libya, initially he relied on diplomacy to have Gaddafi relinquish power in a peaceful way. Many Republicans called him timid and urged him to take stronger action right away. The ultimate results show that Obama’s patience and deliberate way of tackling the crises proved to be very effective.

Obama has demonstrated that you can accomplish security goals by using brains over muscles. Republicans usually have the reputation of being strong when it comes to defense and security, but Democratic Obama has shown an uncanny ability to use the military force in a very intelligent way and achieve the desired results with minimum loss of American lives and at minimum cost. Time and again, Obama has convincingly shown that you can do more with less. Obama’s string of successes in a short period of time has made him the most successful security president of modern times. Even some of Obama's Republican critics have conceded that Obama has made some "gutsy" calls. Also, Obama and First Lady Mrs. Michelle Obama have tirelessly worked to ensure that the veterans and their families are treated well. Obama has proved to be one of be the most effective Commanders-in Chief in recent history. No wonder why the Republican presidential candidates have been uncharacteristically quiet on the issue of security that would normally feature as the number one issue in the presidential politics.

Obama speeded up the withdrawal of the U.S. armed forces from Iraq and put the withdrawal from Afghanistan on a fast track. In Iraq, the insurgency has its roots in the religious discord between the majority Shiite and minority Sunni populations; therefore, even if the U.S. stayed in Iraq for a few more years, the animosity between the two groups will still be there. Whatever differences exist between the two sects, those differences have to be bridged by themselves; our continuing involvement there only makes it harder for them to reconcile. In the absence of a clear-cut mission, our presence in Iraq is an unnecessary burden on the taxpayers and now that Obama has made a decision to pull them out by the end of 2011, it’s all for the best. It’s interesting that hard-core Republican ideologues are now criticizing Obama for this wise decision which is being overwhelmingly supported by the American people (as a matter of fact, the decision to pull out by the end of 2011 was originally made by Bush). Obama seems to have completely neutralized the Republican’s winning issue of defense and security.

Some political analysts argue that Obama’s intelligent foreign policy and all of his impressive successes may not be enough for him to win re-election because the people tend to vote based on economic issues. While that may be true in theory, Obama’s successes do reduce the war costs at a time when our deficits are running high; so his performance as a war-time president does have economic implications. For Obama to be re-elected, the unemployment doesn’t have to come down a lot; if, in the next year or so, economy starts showing the signs that we are moving in the right direction, that may be just enough to tilt the balance in his favor. Many Americans understand that Bush left an array of serious problems and it takes time to tackle those complex problems. Also, the people understand that Republicans control the House, so in a divided government Obama is not free to do things that he wants to do to get economy growing again. Obama’s solid leadership in foreign affairs combined with his sincere efforts on economy may be just enough to win him a second chance.

Occupy Wall Street - A populous revolt against “the government of the rich, by the rich, and for the rich”

2011-10-15T21:08:00.014-04:00

Posted by Shyam Moondra

Occupy Wall Street, a leaderless protest by mostly young people, started out only about a month ago in New York’s financial district but has now quickly spread to other American cities and across continents. Yesterday, this rapid fire revolution turned violent in Rome, Italy. The House Majority Leader Eric Cantor (R) called them a "mob." Some conservative commentators labeled these angry young people as a misguided minority. However, the latest opinion polls paint a very different picture; these young revolutionaries in fact enjoy twice as much support among the general public as does the Tea Partiers. Not only that, the main demand of the protesters, to increase the taxes for the rich, is now supported by a whopping 73% of the people, including 53% of the Republicans.

Many conservative political pundits have taken a dismissive attitude towards the Wall Street protesters by labeling them as a bunch of losers that are anti-rich and anti-capitalist system. That’s a complete misread of the situation. These young protesters, many of them with college degrees and crushing student loans, are faced with high level of unemployment and lack of opportunities to realize their dreams. They are not anti-rich or anti-capitalist system; they are simply protesting against the inequitable system that treats rich and powerful people a lot more favorably than the ordinary folks. They are angry at the excessive compensation of corporate executives (that increased by 300% since 1990), who caused the financial crisis and still got bailed out by the government. They are angry at the Exxon-Mobil Board that granted a $400 million retirement package to a former CEO. They are angry at the report that GE paid zero income taxes in 2010. What these young people are protesting against is a system that’s designed to favor the rich and powerful. The recent census survey results clearly show the disparities and the widening gap between the rich and the poor. The rich people became rich, not exclusively because of their hard work, but mostly because of the pro-rich government policies that granted them special breaks and lower income tax rates.

The Congressional Republicans’ emphasis on spending cuts and no tax increases is just a continuation of their policy of favoring the rich over the struggling working class people. They know very well that spending cuts would negatively affect largely the low-income and middle-income families while no tax increases mean maintaining the status-quo for the rich. The low-income and middle-income families account for 67% of the overall consumer spending, so if they are hurt by government spending cuts then it would make that much harder to recover from the recession and we will continue to see an elevated level of unemployment rate. The Republicans blame President Barack Obama for initiating a class-warfare, when in fact they themselves have been engaged in class-warfare all these years by giving the rich all kinds of special breaks. It's interesting to note that a majority of the members of the Congress are themselves millionaires. Even rich Republican Presidential candidate Herman Cain’s 9-9-9 plan (a flat 9% income tax rate for corporations, a flat 9% income tax rate for individuals, and a flat 9% sales tax for everyone) is laced with the same ill-timed pro-rich philosophy. Most low-income and middle-income struggling families, who live from pay-check to pay-check, would see a net increase in their taxes while the rich people would see a net decrease in their taxes because Cain is also proposing to eliminate capital-gains and estate taxes that largely benefit the affluent people. The 9-9-9 is actually a code language to make rich people richer while piling up on the pain for the struggling ordinary people.

Here are some actionable initiatives that the Congress could look at to reflect the mood of their constituents:

• Reform the tax code. Corporations and rich people must pay more in income taxes; it’s unacceptable when GE pays zero taxes or Google pays only 2% or Goldman Sachs pays only 10% and when billionaire Warren Buffett pays a lower rate than his secretary.

• Close off-shore tax loop-holes that corporations use to escape from paying their fair share of taxes.

• Eliminate tax subsidies to corporations (e.g., to rich oil companies, hedge funds, drug companies, and farmers).

• Impose limits on how much corporate CEOs can make (as a multiple of the lowest paid employee in the company). Ban golden parachutes accorded to executives, especially to those who were fired for non-performance or those who are retiring.

• Ban campaign contributions by corporations and their representatives that are polluting our political system. Big money from big business is drowning out the voice of the ordinary citizens. Through their relentless lobbying efforts, the corrupt corporations are able to win special breaks often at the expense of consumers.

• Create an environment where corporations are induced to become more ethical via stricter enforcement of the laws against insider trading and manipulation by the SEC, CFTC, Federal Reserve Board, and FDIC.

The Occupy Wall Street movement has sparked a debate on how the system is rigged in favor of the rich and how it has made almost impossible for the poor people to climb out of poverty. Given the increasing broad support of the Occupiers among the population, the Republican Party seems to be stuck on the wrong side of the debate just before the up-coming general election. It would be a fatal political mistake to assume that this revolution is just a fad and it will go away, and that it will have no impact on the 2012 elections.

War or no war, that is the question

2011-10-08T17:00:00.007-04:00

Posted by Shyam Moondra

This week, America marks the 10th anniversary of the Afghanistan war, the longest running war in the nation's history. The Afghanistan campaign began soon after Al Qaeda attacked the U.S. mainland on September 11, 2001. And then we started yet another war in Iraq to topple the brutal regime of Saddam Hussein and seize Iraq’s non-existent weapons of mass destruction. The U.S. has become a habitual warrior with perpetual military campaigns undertaken by its armed forces around the world. After the World War II, the U.S. has been militarily involved in the Korean peninsula (1950-1953), Vietnam (1964-1973), Iranian hostage crisis (1979-1980), Lebanon civil war (1982-1984), Grenada (1983), Panama (1989), Gulf war (1991), Somalia (1992-1993), Bosnia (1995), and Kosovo (1999). Not to forget an assorted collection of skirmishes around the world involving Cuba, Guatemala, Angola, Cambodia, Laos, Dominican Republic, Philippines, Iran, Iraq no-fly zone, Haiti, Kenya, Somalia, El Salvador, Nicaragua, Honduras, Bolivia, Liberia, Chile, Albania, Zaire (Congo), China (to protect Taiwan isles), Yemen, Pakistan, Libya, etc. It seems like the U.S. is addicted to wars. When discussing the Pentagon’s budgetary needs, even politicians often talk in terms of how many wars the Pentagon can fight simultaneously. Our defense planning presumes that we will always be involved in wars. On the other hand, other major military powers such as Russia and China, have had less frequent armed conflicts and they spend a lot less on defense than we do. After the World War II, during the Cold War, the former Soviet Union invaded East European countries and imposed the communist rule there and in the 1980's they invaded Afghanistan. More recently, Russian military has fought against insurgents in Chechnya and invaded Georgia. China invaded India during the 1960's but more recently it has had some minor skirmishes with the neighboring countries (such as Vietnam) over the territorial disputes involving some tiny islands in the South China Sea.

In modern history, the Democratic Presidents, in general, have been reluctant to engage in wars while the Republican Presidents have been more eager to flex military muscle to achieve their foreign policy goals. President John Kennedy (D) tried very hard to not let the Cuban missile crisis turn into a major conflict between the U.S. and the former Soviet Union. President Kennedy also resisted the temptation to get involved in Vietnam. While President Lyndon Johnson (D) escalated the military campaign in Vietnam, it was President Richard Nixon (R) who expanded the bombing campaign to include neighboring countries such as Laos and Cambodia. President Jimmy Carter (D) was extremely reluctant to use military force; he was perceived as a weak president which led the Soviet Union to invade Afghanistan. Even when Carter tried to use military, for example to free the American hostages in Iran, he failed. President Ronald Reagan (R) was more open to the use of military (Grenada, Panama, Lebanon, Iran, Nicaragua, El Salvador, etc.). President H. W. Bush (R) ordered a major military campaign against Iraq to expel the Iraqi invaders from Kuwait. President Bill Clinton (D) was a reluctant Commander-in-Chief; he was primarily focused on economic issues (his election campaign strategy was based on “it’s economy, stupid”). Clinton entered the Kosovo campaign only after the Europeans kept urging him to do so and Clinton sent the American troops to Somalia in the midst of a civil war only after a drumbeat from the Congressional Republicans. Some argue that Clinton's response to Al Qaeda’s terrorist acts in Kenya and Yemen was too timid which only emboldened Al Qaeda. After the Al Qaeda attack in September 2001, President George W. Bush (R) held nothing back and unleashed the U.S. military might in Afghanistan and Iraq at a cost of over $1 trillion. President Barack Obama (D) has been very eager to end our involvement in Iraq and Afghanistan and he has been very guarded against getting sucked too deep into the civil war of Libya. Like Clinton, Obama's main focus is on economy and jobs and he is not interested in creating distractions by engaging in wars.

Most presidents are aware that it’s easy to get in but it’s very hard to get out of a conflict, given the uncertain outcomes of the wars. Bush invaded Iraq to seize weapons of mass destruction but when those weapons were not found, he changed the mission to fight Al Qaeda, and then to establish democracy, and then to nation building at a cost of almost a trillion dollars. The same thing happened in Afghanistan – the initial mission was to remove the Taliban from power because they gave sanctuary to Al Qaeda, but then the mission changed to establishing democracy, and then to nation building.

In a recent Pew opinion poll, 45% of the general population said neither of the wars in Afghanistan and Iraq has been worth the costs. And half of the public say the wars have not made them feel more secured. Even among the post-9/11 veterans, only one-third say the wars have been worth the costs. In Afghanistan, as soon as we leave, it’s almost certain that the Taliban will takeover the government. So the question is should we be spending enormous amount of money to keep the Taliban in check just for a short duration? It seems like we are fighting a battle in vain and wasting our valuable resources at a time when we are experiencing severe financial crisis at home. During the 1980’s, the former Soviet Union invaded Afghanistan but the Soviet army was forced to leave in defeat. Given the tenacity of the mobile Taliban fighters, it’s almost certain that as soon as the NATO forces leave by 2015, the Taliban would prevail over the Afghan forces. In retrospect, the best strategy would have been for Bush to negotiate a settlement with the weakened Taliban right after we installed the Karzai government there.

The Pentagon is a wasteland of tax-dollars. We spend in excess of 4.7% of our GDP on defense (up from 3.1% in 2001). The more military power we have, the more eager we seem to become to use it. Republicans are haggling over a few billions of dollars for children's programs at home while they have no qualm against spending billions of dollars in far flung places, even though they are not a direct security threat to the United States. Having enormous military assets means we are the de facto world police. The history has clearly demonstrated that our military involvement in Korea, Vietnam, Iraq, and Afghanistan have cost us the lives of thousands of our soldiers and trillions of dollars, but they have really not brought out the results worthy of those sacrifices. Knowing that we have the most powerful military in the world has sometimes led us to erroneously believe that we have the right to intervene militarily anywhere and everywhere at whim. In many cases, even though other countries can deal with their regional crises themselves but they just find it more convenient and less costly to let the well-armed (and always eager to oblige) Yankees do it. There is so much money lying around at the Pentagon that they don't care if they paid $500 for toilet seats or $100 for hammers. During the Iraq war, billions of dollars of cash simply vanished in thin air (even today, it's unaccounted for) or paid to the contractors without any proper paperwork (so nobody can tell what services were provided by those contractors). Per the government audits, the suppliers of defense equipment routinely overbill the government.

Recent wars in Afghanistan and Iraq have not made us more secured. Our presence in Muslim countries has fueled anti-Americanism among the local populations and strengthened the hands of Islamic extremists. Our involvement in the World War I and II had moral underpinnings and we were treated by the local populations as heroes or saviors, but that is not the case in Afghanistan and Iraq. Obama was wise to not jump into the civil war in Libya and wait until the Arab League formally asked to intervene. Also, Obama was correct in limiting the campaign to air support and not putting soldiers on the ground that would have been more inflammatory to some of the Islamic fundamentalists in the Muslim world.

The “Arab Spring” revolution sweeping through Northern Africa and Middle-East is being driven by the youth who are angry because of high unemployment and lack of opportunities to realize their dreams. They used Facebook and Twitter to galvanize the revolution. Thanks to Internet, the youngsters in these Muslim countries were knowledgeable about how the kids lived and what they did in developed countries, and they very much wanted to emulate those life styles. The older generation was also unhappy but they were too afraid to speak up in police states. However, when they saw the brave young people protesting in masses, they overcame their fear and felt like they had nothing to lose. The protests were not fueled by any Islamic fundamentalist groups. This revolution is in its truest sense a revolution of the masses across all ethnic groups and not driven by any particular anti-western group. The younger generation doesn't subscribe to the old rigid Islamic rules. Besides, they will be busy rebuilding their countries, so they wouldn't have time for radical indoctrination. Islamic radicalism will thus decline. This is the best opportunity for the U.S. to scale down its military operations in the Muslim world and eventually cease these operations completely. The U.S. should focus more on interacting with the younger generation to help them rebuild their countries and work collaboratively on technologies, education, and trade so that they can improve their own living standards.

Strong military helps protect our security and economic interests around the world and it serves as a deterrent to potential adversaries. Wars afford an opportunity of hands-on field experience to our armed forces that keeps them on their toes and sharp. Our huge investments in new technologies and military strategies make our military the best in the world. For example, the use of drones, the unmanned vehicles, such as the one used in last week's killing of Al Qaeda's Anwar al-Awlaki in Yemen, is proving to be very effective. Our defense funding also keeps our military industrial complex financially healthy that enables them to keep churning out new breakthrough technologies. On the negative side, our constant engagement in multiple wars is proving to be a huge financial burden on taxpayers that is becoming increasingly untenable given our high debt and budget deficit. Obama seems to have understood that the best strategy is to combine first-rate intelligence, special operations, and the use of remote capabilities (e.g., unmanned drones and other high-tech systems) to achieve the desired results at minimum cost. His focus seems to be not on big military but on smart military.

Presently, a Congressional Super Committee is trying to come up with a deficit reduction plan. If this special congressional panel fails to agree on the mandated deficit savings of $1.5 trillion by this November, there will be across-the-board cuts in all discretionary spending, including the defense budget. The potential for sharp cuts in the Pentagon budget has got Defense Secretary, Leon Panetta, quite worried because that would force us to fight wars more selectively. Now, would that be such a bad thing?

How can Republicans reverse their awful polling numbers?

2011-09-20T14:01:00.011-04:00

Posted by Shyam Moondra

A recent CBS News/NYT opinion poll reveals growing populous dissatisfaction over the performance of the Congress in general and Republicans in particular. The congress has an approval rating of only 12%, a record low. Among the Republicans, a whopping 84% of the people think that the incumbent members of the Congress do not deserve to be re-elected. Clearly, the Republican strategy of saying “No” to everything that Democrats proposed or hitching with the extremist Tea Party or pushing the country over the cliff on the debt issue (that resulted in the downgrade of the Treasury securities by S&P) has backfired. The Republicans, especially in the House, seem to have pursued a policy of deliberately harming the economy to drive President Obama’s approval rating down thinking that a weakened incumbent president will be easier to defeat in 2012. However, the polls show that the Republican tactics and intransigence have hurt them more than Obama, who still enjoys an approval rating of 43% which is much higher than that of the Congress.

The American people understand that Obama inherited most of the problems from his predecessor President George W. Bush. Bush started a costly war in Iraq (that many believe was a war of choice rather than need), gave unnecessary tax cuts to the rich and tax subsidies to the corporations at a time of war when you normally expect everyone to pay higher taxes to cover the cost of the war, and budgeted hundreds of billions of dollars to bailout financial institutions that were on the verge of collapse (thanks to Bush’s lax regulations). When Obama became the president, he inherited an economy sliding into recession (2.6 million jobs lost in 2008, the final year of the Bush presidency), bulging budget deficits and national debt, and national icons such as GM headed for bankruptcy (and possibly hundreds of thousands of lost jobs). Obama had no choice but to stabilize the financial sector and the auto industry, undertake a big stimulus program to immediately create jobs, and extend the Bush tax cuts for two more years to help economy recover. Had Obama not done all of that, the unemployment rate would probably have gone up to 15%. Obama was correct in negotiating a long-term plan with House Speaker, John Boehmer, to reduce deficit by over $4 trillion over ten years (that included tax and entitlement reforms), a plan from which Boehner walked away because he failed to muster the support of the Tea Partiers within his party ranks.

The economy is still struggling and the people have pretty much given up on Congressional Republicans, as is clear from the polling data. So now the question is what should Republicans do in the next fourteen months to position themselves to win the White House, keep the control of the House, and possibly win the control of the Senate?

Republicans’ fallacious reasoning:

First, let’s look at the faulty thinking of the Republicans on many issues that suggests that they don’t really understand Economics 101:

• Republicans say that higher taxes on the rich will hamper job creation, but that's not true. In the current environment, it’s the increased consumer spending and not capital availability that will drive the economy. The U.S. corporations are hoarding close to $2 trillion cash, so it is not the capital that will motivate them to hire more workers. They need more demand for their products and services. However, as the polls show, this recession has decimated the middle-class and low-income families (they lost the most ground in terms of their income while the upper-income people lost the least) that generate most of the consumer demand in our economy. That means if millionaires and billionaires pay more in taxes, it will not lead to fewer jobs but to the contrary it will help reduce deficit and bring about more favorable effects on economy. In any case, Bush gave the rich people tax breaks at a time when we were engaged in two costly wars. The wars cost $1 trillion and he gave away $1 trillion in tax breaks; if he had not given away tax breaks, we would not have had huge deficit and debt as we have today.

• Republicans, especially the Tea Partiers, say that balancing the budget quickly will be positive for the economy, but that’s not true. A precipitous cut in government spending will hit the middle-class and low-income families more than the rich people and that will in fact reduce consumer spending even more. As a result, economy will revert back to recession with unemployment rate going up. In fact, most economists would readily affirm that what we really need is a short-term plan to stimulate economy and a long-term plan to bring down deficit, rather than try to balance the budget right away at a time when the economy is still struggling.

• Republicans keep saying that health care mandate is unconstitutional. Today, all of the states have mandatory car insurance and Texas even requires mandatory controversial HPV injections for 11- and 12-year old school girls. There are times when the larger public good requires government’s mandatory actions. In case of health care, if the insurance were not mandatory, the people would buy insurance only when they get sick, putting the burden of treating the uninsured people on those who do have insurance and thereby increase the cost of health care for everybody. You cannot apply a broad brush to all government mandates and label them as intrusion in the lives of the people.

This is what Republicans should do:

• Bring more civility in how the federal government works. The poll shows that 84% of the people are dissatisfied or angry about the political gridlock. The people want economic problems solved and that means Republicans and Democrats must compromise to move forward on job creation, etc.

• Stop taking a rigid ideology to the extreme that makes rational policy decisions almost impossible. It is fine to have convictions on smaller government and lower taxes, but Republicans must be flexible enough to develop pragmatic policy alternatives. President Ronald Reagan strongly believed in lower taxes, and yet, from time to time, he agreed to increase certain taxes in return for other reforms that would help him achieve his overall broader policy goals. In a democracy, especially when you have a divided government, horse trading is inevitable. Drawing a line in sand based on rigid ideology leads to a path of “my way or highway” that almost never bears fruits and it turns off the voters. In the eyes of the people, Republicans appear to be unreasonable and obstructionist.

• Embrace the concept of “smaller government” but disassociate from the toxic Tea Party. When economy was doing really bad and deficit was running high, many people were angry and they enthusiastically supported Tea Party out of frustration. However, since then, the people are coming to the conclusion that the Tea Partiers are too extreme and they have gotten in the way of economic recovery. Many of the Tea Partiers openly advocated a default on the U.S. debt that would have brought catastrophic results for the global economy. Their unyielding stand forced the Republicans to engage in an ugly debate on increasing the debt ceiling limit that eventually led S&P to lower the U.S. debt rating from AAA to AA. Republicans would be wise to disassociate themselves from Tea Party and, as Senate Minority Leader, Mitch McConnell, put it, save the Republican brand from being irreparably damaged. The extreme tendencies of the Tea Partiers are detrimental to effective governing.

• Focus on what people want. The recent poll shows that 59% of the people are concerned about economy and jobs and only 8% think that budget deficit and national debt are immediate problems. Republicans need to get off the deficit wagon and focus more on job creation. Republican presidential candidate Gov. Mitt Romney has put forward a jobs plan; the people want to see more ideas from Republicans on this issue.

• In terms of public policy issues, the polls show that over 80% of the people support reducing taxes for small businesses and increasing spending on infrastructure improvement projects (needed to be competitive in global trade); 58% support temporarily reducing payroll taxes to stimulate economy; 52% support federal aid to states to avoid layoffs of teachers (decimating education will negatively affect our global competitiveness), police officers, and fire fighters; and 56% of the people support Warren Buffett’s idea of increasing income taxes on millionaires and billionaires. These issues have a wide support among the Independents and even many Republicans. The poll also shows that there is no support for repealing the Obama health care plan which seems to be high on the Republican agenda.
• To stimulate consumer demand, we need more spending by the government in the interim, and at the same time we need a long-term plan to reduce deficit by at least $4 trillion over the next ten years that should be accomplished by a combination of tax increases on the rich, closing corporate tax loop-holes, and spending cuts (including entitlement reforms) as recommended by the bi-partisan Deficit/Debt Commission. Republicans must negotiate with Democrats a short-term stimulus plan and a long-term deficit reduction plan now, not after the 2012 election.

Republicans should stop being obstructionist and get on with the job of fixing the economy without any further delay. If they don’t, their poll numbers will only get worse and they will lose their bid for the White House in 2012.

Economic recovery is contingent upon strengthening the middle-class

2011-09-15T14:25:00.011-04:00

Posted by Shyam Moondra

The latest Census Report for 2010 includes some startling and yet not totally unexpected statistics on income distribution in the United States. Below are the highlights from this report:

• In 2010, the number of American households living under poverty (i.e., earning less than $22,113 per year) increased by 2.6 million to 46.2 million, the largest increase in the last 50 years. These families accounted for over 15% of the population.

• The median income of the U.S. households declined for the third straight year since the recession began in 2007 and stood at $49,445. The Blacks and Hispanics suffered the biggest losses.

• Among the various income groups, the top 5% of households saw the smallest decline in income in 2010, while the bottom 20% of households saw the biggest decline of 38%.

• The richest 20% of the population accounted for more than half of the 2010 pre-tax income, while the bottom 20% got only 11%.

The above data suggests the following:

• The cherished middle class has steadily lost ground relative to the affluent upper-class over the last decade. The decline of the middle-class began with the presidency of George W. Bush, who showered the rich individuals with income tax cuts and special deductions and credits and gave away tax subsidies to corporations that ultimately benefited the rich people more than the average Americans.

• The rich got richer and poor got poorer, with the gap between the rich and the poor widening to the point that there is legitimate worry about a possible popular revolt against the government policies and resentment against the rich and powerful.

We have near zero interest rates and low inflation, and yet the economy is not getting a lift. It seems as if the old proven economic theories don’t work any more. In general, plentiful money supply, low interest rates, and increased government spending should boost the economy, but not this time. Here are the plausible reasons why we are having such a hard time in recovering from the 2007 recession that officially ended in June of 2009:

• The demise of the middle-class, the backbone of the U.S. economy, has reduced the spending capacity of the average consumers, which, in turn, is making it harder for the economy to recover. The Republicans say that businesses create jobs, which is true only if consumers spend. So, ultimately, it's the robust middle-class that will pave the way for job creation.

• The continuing weakness in the housing sector, caused by contradictory and often confusing government policies on home foreclosures, is contributing to the economic sluggishness. The government bailed out the financial institutions burdened with the collapse of the mortgage-based securities market, but more recently entities such as Freddie/Fannie and AIG, partially owned by the federal government, are orchestrating to recover the losses they sustained on their investments in those securities. Also, State Attorney Generals are pushing for huge monetary penalties on the banks for faulty procedures used by the banks to foreclose the properties. The State AGs are asking for expensive remedies such as forgiving part of the mortgage loans and/or reducing mortgage interest rates. The government’s uncoordinated actions are pushing the banks towards another financial crisis; unfortunately, thanks to the new financial regulations bill passed by the Congress, the banks cannot be bailed out any more. This raises the specter of another round of credit freeze that will devastate the economy. These government’s not-so-well-thought-out approaches are also prolonging the misery of the homeowners and thus making it difficult for the housing market to recover.

• Recent regulatory regimes adopted by the Congress for the financial sector and for health care have created a lot of uncertainty and that’s why the corporate world is not aggressively spending their cash hoard of $2 trillion on new capital projects and they are not hiring new employees. Without new hiring, the unemployment rate is stuck at an uncomfortable level of over 9% and consumers are holding back, creating a vicious cycle that is making it harder for the economy to gain traction.

The Republican Party’s focus on cutting government spending is ill timed. Most of their targeted spending cuts will affect the struggling middle-class people, which means no economic recovery and a wider gap between the rich and the poor. The stalled economy definitely needs a stimulating jolt, but the Republicans are resisting new stimulus spending, e.g., on infrastructure projects. At the same time, our budget deficit keeps growing and national debt reaching to dangerously high levels. Because of the ideological divide, we are at a cross road with no clear path to prosperity. Republicans want to balance the budget by cutting spending (which will decimate the middle-class and economy and the unemployment rate will go up) and Democrats want to balance the budget by increasing taxes (that will also negatively affect the economy).

Clearly, neither approach is correct. What we need is a balanced approach that will provide stimulus in the near-term to boost the economy but also put us on a long-term path to fiscal sanity. We need to provide some stimulus now (meaning more government spending) and, at the same time, have a long-term plan to cut spending (including reforms of entitlement programs) and enhance tax revenues. Right now, the American people desperately want more jobs; they don’t care about the deficit and debt.

The Congressional Super Committee has been tasked to come up with a $1.5 trillion plan to reduce deficit by November. Such a plan is just a first step. The financial markets are actually looking for a grand plan to reduce deficit by $4-5 trillion over ten years that consists of spending cuts (mostly in later years) and net tax revenue enhancement via tax law reforms to reduce the overall tax rates and eliminate all special interest deductions and credits. The rich people and corporations must pay their fair share of taxes. I believe the American Jobs Act, proposed by President Obama, achieves the desired balanced approach. Republicans must work cooperatively with Obama and Congressional Democrats to move swiftly on this bill right now rather than wait until after the 2012 election which is fourteen months away.

In last ten days, investors lost $2 trillion - fear and uncertainty are the culprits

2011-08-05T11:14:00.017-04:00

Posted by Shyam Moondra

Over the past ten days, the S&P 500 index has declined by 11%, wiping out close to $2 trillion worth of wealth. This big decline over a rather short period has been reported as the largest since 1978 when economy was heading towards recession with double-digit inflation and interest rates. Of course, at the present time, we are just coming out of recession and inflation and interest rates are nowhere near the early 1980's levels. In addition, corporate profits are currently running at record levels with their balance sheets in pristine condition. Therefore, it would seem that the market decline over the last few days was perhaps a knee-jerk reaction to the ugliness of the Congressional debate over the issue of extending the federal debt-limit. Investors are fearful of the toxic environment in the Congress because it breeds uncertainty and it leads to loss of confidence in the government's ability to deal with the tough issues of budget deficit and national debt.

After the unprecedented financial crisis of 2008-2009, which was precipitated by the crash in housing market, the Fed slashed interest rates to near zero and pumped liquidity into the markets. Also, the Obama Administration asked for and received funding from the Congress to implement a big stimulus program consisting of temporary income tax relief and increased spending on infrastructure. Those efforts were successful in stabilizing the financial institutions, helping economy turn around, creating jobs, and giving a big boost to the flagging stock market that made a dramatic u-turn and recovered most of the losses of 2008. However, lately, there are signs that the economy is losing steam and some fear that we may be headed into a double-dip recession.

Negatives in the economy:

· The ugly spectacle of debt-limit debate in the Congress and the partial FAA shutdown because of the political reasons have led to business leaders' lack of confidence in the government's ability to handle major problems. The extremism of the Republican Party incited by their Tea Party comrades has hurt the overall economy. The latest opinion poll shows that 84% of Americans disapprove the way the members of Congress are doing their jobs, which is the worst rating ever. In particular, Republicans and Tea Party members received very high negative ratings.

· Recent major regulatory reforms for financial institutions and health care have contributed to uncertainty as to how those reforms would affect the corporate costs and profitability. Although the new reforms are being phased-in over time, some of the aspects of these reforms are being delayed because Republicans are holding up the funding for the implementation of parts of the reforms that they don't like. These tactics have created uncertainty and many businesses are overwhelmed with the implementation issues and unsure about what would be their eventual costs.

· On-again and off-again approach to the European debt situation has negatively affected the U.S. markets. The conflicting viewpoints within the EU community have delayed the resolution of these problems in a convincing manner. Since the U.S. financial institutions are directly or indirectly affected by all this, it has proven to be a big negative for the U.S. stock markets.

· Since the financial crisis of 2008, most governments, local, state, and federal, are tightening their belts to reduce their budget deficits. Many other countries are doing the same. In the near-term, these cutbacks in government spending around the world are negatively affecting consumer spending and thus making it harder to keep the recovery going.

Positives in the economy:

· Corporate profits are at record levels, exceeding the pre-financial crisis levels of 2007. The corporations hoard $2 trillion cash and their balance sheets have never looked so strong. However, because of the uncertainty and lack of confidence in the political arena, the corporations are holding back and not aggressively investing in capital projects.

· The consumers have done a good job in managing their household budgets. They have reduced their debt and they have been saving more. However, chronic high unemployment rate has been making them reluctant to start freely spending again.

· The declining government spending may be a negative in the near-term; however, it will be a big positive for the future because this will help keep interest rates low going forward.

· In spite of the recovery from the recession of 2008-2009, inflation and interest rates continue to be low which is ideal for continued economic growth.

. The stock market valuation is below normal. The trailing PE ratio for S&P 500 is less than 13 and forward PE is under 12. That's hardly the level that would trigger a huge sell-off like the one we are seeing now. The investors are gripped with fear and they are dumping their shares out of panic.

· The Fed has been very accommodating on monetary policy and they may be ready with QE3 in response to the market crash over the last two weeks.

· The U.S. companies are doing a very good job in exporting goods and services to other countries. In fact, the export sector is one of the strongest performers in our economy right now.

What needs to happen?

· The acrimonious political environment in Washington, DC must end to inspire confidence. The businesses need to be sure that the government officials can behave like adults and make rational decisions.

· The government needs to have another look at health care and financial regulations to bring more clarity and do away with the parts that are proving to be too onerous on businesses. Republicans and Democrats need to resolve their differences on how to move the implementation forward and remove uncertainty that's hanging over the employers, small and large.

· In light of a sharp decline in the stock market in recent days and sluggishness in economy, the Fed should immediately begin a QE3 program to provide more liquidity.

· The Obama administration and the Congress need to work cooperatively to come up with ideas for creating jobs such as targeted tax reductions, new trade agreements that will help the U.S. businesses export more of their goods and services to other countries, training the labor force for high-tech high-paying jobs, etc.

· The government needs to keep working at the budget deficit and debt problems, using a balanced approach. We need to increase taxes on the rich, close the corporate tax loopholes, and reduce wasteful government spending over time. We also need to look at entitlement reforms to preserve those programs for the long-term. The deficit problem can't be fixed overnight; excessive spending cuts at a time when economy is still struggling would be unhelpful. However, we do need a credible plan to eventually balance the budget and retire some of the national debt.

· The state and federal governments should extract procedural reforms from banks on how the foreclosures are handled, but they should not insist on huge monetary penalties. The financial institutions are not yet on sound footing, so the governments should be careful and not push the banks towards another financial crisis.

"Vinash Kale Vipreet Budhi" - Republicans gone mad and self-destruction is imminent

2011-07-25T07:21:00.005-04:00

Posted by Shyam Moondra

Republicans are playing a losing game with a weak hand - they will not achieve their goals but they will do serious harm to the country and the American people will not forgive them for this.

If there is a rating downgrade or actual default on the U.S. debt, the markets will crash and rich individuals and corporations will suffer most of the losses. It's inconceivable that Republicans would be stupid enough to hurt their own supporters because that would mean less campaign contributions and a humiliating defeat in the next election.

President Obama is on the right side - his suggestion to reduce deficit by cutting spending and raising tax revenues in a 3:1 ratio is very reasonable and that is a proven formula used by President Reagan and President Clinton that brought prosperity. In any case, Obama is morally right in asserting that rich people also share in the pain. As President Lincoln once said you place your feet in the right place and then hold firm. Obama has overwhelming support from the American people on his position.

As to the Republicans, they have gone completely mad, or as the British would say "nutters." There is a saying in Sanskrit "Vinash Kale Vipreet Budhi" (do Google search to understand it better) - their brains gone mad and self-destruction is imminent. It's like Pakistan supported extremist Taliban and now Taliban is destroying Pakistan - Republicans supported extremist Tea Party and now Tea Partiers are destroying Republican Party. May be the decline of the United States is "written," as in karma; the God is merely using Republicans as an enabler to massive self-destruction.

In a democracy, the people are the supreme. However, at the moment, a handful of Republicans and their leaders have taken the people and their fate as hostages, and the people are helpless because the next election is so far away.

The Republican approach to debt limit is riddled with inconsistencies - they get an "F"

2011-07-16T09:44:00.007-04:00

Posted by Shyam Moondra

The negotiations on extending the debt limit have been going on between the Republicans and Democrats for weeks without any progress. The Republicans are behaving badly. They are not negotiating in good faith and they are being inconsistent in their approach. Here are some examples:

· The House Speaker Boehmer keeps saying that President Obama has not offered a plan. The Congress spent the money during the Bush presidency and it's their job to come up with a plan. Obama has made suggestions and told the Congress what he wants, but it's the Congress' job to come up with a plan on how to reduce the deficit.

· Republicans want to balance the budget as soon as possible. Obama offered his support for a big $4 trillion plan but Republicans are dragging their feet; now they say that they prefer a smaller plan which will take forever to balance the budget.

· Republicans want to talk about what they want but walk away when others want to talk about things Republicans don't like. In negotiations, one should expect give-and-take; we have a democracy not dictatorship. Republicans want 100% of what they want and 0% of what others want - how do you expect to make a deal?

· President Bush increased the budget deficit by over $4 trillion by going on a reckless spending spree supported by the Congressional Republicans. Bush spent $1 trillion on tax cuts to the rich, $1 trillion on the unnecessary Iraq war (no WMD found), $1 trillion on bank bailouts (if Bush hadn't relaxed regulations, may be the financial crisis wouldn't have happened), and $1 trillion on tax subsidies to oil companies, farmers, drug companies, etc. So, as a starting point, why not just "undo" what Bush did (of course, war money is gone, so nothing can be done about that).

· Republicans want to slash or get rid of Social Security and Medicare. These programs didn't create the deficit (in fact, Congress has been siphoning surplus funds from Social Security and spending that money on other things), so it makes no sense to make these programs a primary target for the cuts. Reforming these entitlement programs is a separate issue and it shouldn't be tied to the debt issue.

· Sen. Hatch and other Republicans voted seven times to increase the debt ceiling during the Bush presidency (and that is primarily responsible for our problems today) but now Hatch and others are so vocal about the dire consequences of increasing the debt limit. When Republicans talk from both ends of their mouths, it doesn't inspire confidence and it doesn't look like they are fighting for their principle as they claim.

· Republicans want to reduce the budget deficit. But many of them are saying that not increasing the debt limit is better because that will force the country to live within its means. However, a default will increase the interest rates (which will increase the cost of borrowing) and slowdown economy (which will reduce the tax revenues); so the budget deficit will actually get worse not better. It's like, to get rid of the disease, just kill the patient!

· Republicans are trying desperately to protect the interests of the rich people and corporations, who benefited the most during the Bush presidency. They are even willing to let the country default on its debt; however, a default will crash the markets and reduce corporate profits (because of the slowdown in economy burdened with higher interest rates), severely hurting the very people and businesses Republicans are trying to protect from the proposed tax reforms.

· Republicans argue that even a small tax increase will hurt the economy. However, the fact of the matter is that President Clinton did exactly that to balance the budget during his second term and we had the most prosperous four years in the modern history. Most economists dispute the claim of Republicans that small tax adjustments will have ruinous impact on economy - at the moment, not reducing deficit is more ruinous than a small increase in taxes. In fact, severe spending cuts, as advocated by the Republicans, will reduce consumer spending and thus slowdown the economy.

I think Republicans are handling the issue of debt limit in the worst possible way and they have lost the confidence of the American people, as is evident from the recent opinion polls that show that up to 80% of Americans like the balanced approach being pushed by Obama. The arguments offered by the Republicans are riddled with inconsistencies and, in most part, they are nonsensical. I think Obama's ten-year plan for a $4 trillion deficit reduction that incorporates spending cuts and tax reforms (such as closing certain tax loop-holes, eliminating unnecessary tax subsidies, and limiting deductions for millionaires/billionaires) is the preferred way to go. This plan is balanced and it's large enough to put us on a path of making a big dent in the budget deficit. If Republicans continue on their current inconsistent approach, they will pay a big price in the next round of elections.

New math of political reality on debt default

2011-07-05T15:14:00.004-04:00

Posted by Shyam Moondra

. Debt default = Congressional leadership failure = Resignations by Reid/McConnell and Boehner/Cantor/Pelosi on moral ground.

. Republicans voted to increase debt ceiling 7 times during Bush presidency = Foot dragging now makes them look like hypocrites = Big loss of credibility.

· Debt default = Lower U.S. debt rating = Market crash = Rich people lose their wealth = Lower campaign contributions = Incumbent Obama wins.

· Debt default = Republicans get blamed for their intransigence = Republicans lose control of House in 2012.

· Debt default = Messy government = National security at risk.

· Debt/deficit too high = Budget can't be balanced just based on spending cuts = Need a combination of tax revenues and spending cuts.

· Clinton increased taxes and cut spending = Led to the most prosperous 4 years in a row in modern history = Republicans are overstating the effect of tax increases.

· Bush tax cuts = huge gain for millionaires/billionaires = It's fair and moral to make them share the burden of balancing the budget.

· Too severe spending cuts = Devastating effect on middle-class = Lead to recession and higher joblessness = Republicans, the champions of the rich, get blamed for suffering = Obama wins and house goes to Democrats, both the champions of the middle-class.

· Corporate tax loop holes = GE pays zero taxes, Google pays 2%, and Goldman Sachs pays 10% = Corporations not paying their fair share of taxes = People blame Republicans for catering to business special interests.

· Tax subsidies to filthy rich oil companies, wealthy hedge fund managers, and rich private jet owners = Republicans' blind support for the rich and powerful = Populous revolt by the middle-class against Republicans = Impossible to win an election without the support of the middle-class.

. Bush piled up $4 trillion deficit because of tax cuts to the rich, Iraq war, bank bailouts, and special interest tax subsidies to oil companies and others = Social Security and Medicare didn't cause deficit = Undo Bush policies to reduce deficit rather than target elderly, children, and poor.

Republican positions on deficit reduction defy logic

2011-06-26T15:56:00.009-04:00

Posted by Shyam Moondra

Rep. Eric Kantor (R-Va) and Sen. Jon Kyl (R-AZ), the two Republican members of the bipartisan deficit reduction group led by Vice President Joe Biden, walked out of the negotiations because of their unhappiness over Democrats' insistence on raising income taxes for the rich to supplement the spending cuts worth 1 trillion dollars that they had already identified and agreed to. Negotiations about tough issues invariably involve give-and-take. The Republicans' walking out of deliberations makes them look like a kid who throws tantrums when he is denied a candy. Their political theatrics don't sit well with the American people, who want the problem of budget deficit addressed in a serious and pragmatic way without any ideological constraints.

The arguments put forward by Republicans are deceptive and illogical and they fall short of constructive and cooperative effort that is required to resolve the serious budget issues. Below are some examples of how Republican positions are inconsistent with their stated goals.

Spending cuts vs. tax increases:

Republicans are saying that the huge budget deficit can be narrowed strictly based on cuts in government spending. They point out that any tax increases at a time when economy is still struggling would slowdown the recovery. Well, any economist would readily confirm that huge spending cuts would have just as devastating impact on economic recovery as tax increases would (Ben Bernanke, the FED Chairman, has said that precipitous spending cuts would harm the economy). The fact of the matter is that we can't come out of the big hole we have dug ourselves into without a balanced approach that relies on both spending cuts and tax increases. President Barack Obama has proposed that budget deficit be reduced by mixing spending cuts and tax increases in a 70-30% ratio that seems to be quite realistic and economically viable.

It's abundantly clear that budget deficit of trillions of dollars can't be reduced without sacrifices made by the people of all walks of life. That begs the question of fairness. Under the Republican plan, the low-income and middle-class people, especially the elderly and children, would bear the main brunt of spending cuts while the rich and powerful would be largely unscathed. The middle-class is the backbone of our economy, so it is illogical to suggest that by putting the onus of the cuts on the back of middle-class people would somehow help the economy. Also, Republicans are overstating the negative impact on the economy of any tax increase for millionaires and billionaires. President Bill Clinton increased taxes and cut spending to balance the budget and, as a result, we ended up with the most prosperous four years in the modern times.

The Republicans conveniently forget that a big chunk of the current budget deficit was caused by the income tax cuts given to millionaires and billionaires by President George W. Bush. Obama has proposed to not extend the Bush tax cuts for the rich when they expire next year. The Republicans call this a tax increase, when in fact it's reversing the previous tax cut. The rich people benefited the most under the Bush administration, so it seems fair that they give some of the gains back to help out in this time of national calamity.

Tax breaks for energy sector:

Under the heavy pressure from the lobbyists of the powerful oil companies, the U.S. Senate voted 35-61 against stripping big oil companies of $35 billion in tax-breaks over the next ten years. Republicans argue that if these tax breaks were eliminated, ultimately the consumers would pay more for their energy needs in the future. Again, this assertion by Republicans is unfounded and is deep rooted in their ideology to protect the interests of big businesses. The oil companies are expected to earn $145 billion this year, so the argument that losing $3.5 billion a year in tax subsidy would somehow harm the consumers is an overstatement. The budget deficit is too big and it would require sacrifices by everyone, including the super rich oil companies and other businesses that receive tax subsidies.

Corporate tax loop holes:

Recently, General Electric paid zero taxes, Google paid only 2% in taxes, and Goldman Sachs paid only 10% in taxes. Most companies, small and big, are now engaged in accounting gimmicks that allow them to transfer profits to tax havens in order to reduce their tax liabilities here in the U.S. When the corporate world doesn't pay its fair share of taxes, the tax burden falls more on the individuals, especially the middle-class people. The Republicans are vehemently opposed to Obama's suggestion to close these loop holes and increase tax revenues. Again, Republicans are on the wrong side of this issue.

Increasing debt ceiling:

Some Republicans, who are also Tea Partiers, are advocating that Republicans should not increase the debt ceiling and let the United States default on its debt obligations (Treasury Secretary Tim Geithner has said that if the Congress doesn't increase the debt limit by August 2, 2011, the nation will default). That may seem as a plausible negotiation tactic, but it's a dangerous game to play. The consequences of a U.S. default will be catastrophic; the stock markets will collapse worldwide, followed by prolonged severe recession that could increase the unemployment rate to the levels not seen since the 1930s. High unemployment rates would lead to political unrest throughout the world. Ironically, the asset deflation, which will ensue if the U.S. defaulted, will hurt the rich people the most, the very people that Republicans are currently trying to shield from a rather paltry tax increase.

The budget deficit and debt problems are real and they are huge. They must be addressed in a bi-partisan manner before the problems become intractable. If we let the problems fester, they will require more painful remedies and it will take longer to fix them. It's important that Republicans don't look at everything from their lens of ideology and find common ground with Democrats to get on with the process of putting our house in order. That means Republicans must accept some tax increases for the rich and they must agree to eliminate the tax subsidies to businesses and close the corporate tax loop holes. At the same time, Democrats must understand that we can't spend more than what we have, so it's imperative that spending is brought under control.

Economy losing steam - what to do now?

2011-06-07T13:01:00.008-04:00

Posted by Shyam Moondra

The Federal Reserve Board (FRB) is primarily responsible for the 2008 financial crisis that led to the demise of prominent firms such as Lehman Brothers, brought major financial institutions close to bankruptcy that prompted federal bailouts, crashed the stock market, led to a sharp decline in home prices that triggered the record number of home foreclosures, and caused severe hardship to the American people that suffered from chronic high-level of unemployment. It all started with the easy money policy of former Fed Chairman, Alan Greenspan, who failed to adequately regulate the sub-prime mortgage market that eventually led to the housing bubble. For a while, the current Fed Chairman, Ben Bernanke, misread what was going on in the housing market and he kept saying that sub-prime mortgage was not a problem. Then he said that the problem was manageable. Then, of course, we know that the housing bubble burst and the economy crashed. In the aftermath of the crisis, Bernanke pumped liquidity into the market to avoid a repeat of the depression of the 1930s. However, out of panic, he and the Congress proposed stringent regulations of the financial institutions that are now proving to be an obstacle in achieving full economic recovery. Recently, Bernanke admitted that the FRB lacks the tools to properly analyze how the new regulations would impact the financial sector and the overall economy. It's extraordinary that the government would make major changes in the regulations without understanding the implications. The recent recurrence of economic slowdown and record high budget deficit are the proof that the 2008 financial crisis and its aftermath have not been managed well.

Here are some observations on the flawed policies of the FRB, Congress, and the Obama administration that are preventing the economy from achieving its full potential:

· In the aftermath of the collapse of the housing market, Bernanke came up with a predictable strategy of reducing interest rates to revive the housing market. However, the housing market continues to deteriorate with the housing prices now down by over 33% since the peak of 2007. Low interest rates may in fact be encouraging potential home buyers to put off their decision to buy homes. They are taking low interest rates for granted and are just waiting for home prices to come down even more. If FRB were to start increasing interest rates, homebuyers' trade-off calculations (higher interest rate vs. lower home prices) will change and they may be induced to make a buy decision now rather that play a waiting game. The Fed's low interest rate policy may thus unwittingly be delaying the housing recovery and that may, in turn, be delaying sustainable growth in the overall economy.

· When some of the big financial institutions got in deep trouble, the FRB and Congress became nervous and proposed unprecedented regulations of the financial sector, thereby moving the pendulum from relaxed regulation to the other extreme of too much regulation. In fact, some of these regulations went too far and only now it is becoming apparent that hasty passage of the Dodd-Frank bill may have done more harm than good. For example, to reduce the risk taking ability of the banks, stringent capital requirements were proposed (some FRB members are even talking about doubling the capital requirements from the current levels) that are proving to be counter-productive. If the banks are required to park a big chunk of their capital on the sidelines unproductively, there is that much less cash available to be lent to businesses and consumers. This forced contraction in credit is in fact delaying economic recovery and job creation. The FRB and Congress need to have another look at their proposals that were put together in a hurry.

· President Obama got a massive stimulus package approved by the Congress but it seems to have had less than spectacular impact on economy. Because of the bureaucracy, corruption, and inherent inefficiencies involved with government spending, it doesn't always bring about the desired results in a timely manner. In general, reducing taxes is preferable than increasing government expenditures because taxpayers, that also happen to be the consumers, are in the best position to decide how to spend money. President Obama and Congress should look at targeted tax incentives that can be offered to businesses and individuals to stimulate economy without increasing the budget deficit. Another big spending package is, however, not advisable.

· The FED and Congress also need to reconsider bank regulations related to debit card fee and credit card transaction fee. The government price controls are inconsistent with the free-market concept. If there is lack of competition or there is price fixing, it should be handled through the anti-trust laws rather than through price controls. This micromanagement by the government has in fact backfired. To cover the revenue shortfall caused by debit/credit card regulations, the banks have been aggressively increasing fees on other services and in many cases imposing fees for services that were previously "free". The end result is that the fees and fines, that were previously paid mostly by a small number of irresponsible consumers, are now being paid by all consumers. The new banking regulations were not well thought-out and should be reconsidered.

· Many people in the government, including the state AGs are out to hurt banks if they don't agree to mortgage loan modifications. The government officials are trying to achieve their public policy goals by using private funds, absolving the borrowers of any responsibility of buying homes that they couldn't afford. Yes, banks made mistakes, but it's not all banks' fault. This undue burden has put tremendous pressure on bank stock prices and that is driving the overall market down. This is also negatively affecting consumer confidence, thereby delaying economic recovery. If issues surrounding faulty foreclosures make the banking sector weak or even drive them towards bankruptcy, we will have a financial crisis all over again. These aggressive actions by some of the most liberal state AGs are not helping the economy and unemployment rate may very well hit 12%. The banks must be made to reform their foreclosure processes to make them accurate and fair, but a huge monetary penalty that some AGs are after would be counter-productive. The FRB, Congress, WH, and state AGs are pursuing their uncoordinated policies that are creating a great deal of confusion. The uncertainty caused by all this is driving the stock market and economy down.

· The stock markets are manipulated by big frequent traders that use computerized trading algorithms to move the stock prices up or down in a yo-yo manner, especially around the option expiry dates. These big players make money at the expense of small investors that are not as technology savvy. This new trend has negatively affected the integrity of the markets and driven away small investors. We urgently need to implement reforms that could include limits on short selling/options trading, requiring investors to hold securities for a certain minimum period before they could sell (e.g., until those buy trades are settled), and making such trading practices as pumping-and-dumping, high-frequency trading, etc. as unlawful.

Balancing the budget requires a balancing act

2011-04-21T04:04:00.008-04:00

Posted by Shyam Moondra

Now that the battle has been joined between Republicans and Democrats on how to reduce the budget deficit and national debt, here is my list of what we can do:

· President George W. Bush is responsible for most of the budget deficit and ballooning national debt, so why don't we undo what he did. Stop the wars in Afghanistan and Iraq, let the Bush income tax cuts expire next year, especially for those who are making $250,000 or more a year, repeal corporate tax subsidies (e.g., to oil companies), and close the corporate tax loopholes that enable the corporations to pay very little income tax (e.g., recently, GE paid zero taxes and Google paid only 2% in taxes).

· Following the lead of the private sector and some of the state governments (e.g., New Jersey), the federal government should also cut salaries and benefits of the members of Congress. They should pay higher insurance premiums, deductibles, and co-pay for their government provided gold-plated health care plan. Their overly generous pension benefits should also be slashed.

· The Pentagon is a wasteland of tax-dollars. We spend in excess of 4.7% of our GDP on defense (up from 3.1% in 2001). The more military power we have, the more eager we seem to become to use it. Republicans are haggling over a few billions of dollars for children's programs at home while they have no qualm against spending billions of dollars in Libya, even though Libya is not a security threat to the United States.

Having enormous military assets means we are the de facto world police. The history has clearly demonstrated that our military involvement in Korea, Vietnam, Iraq, Afghanistan, and now Libya may have cost us trillions of dollars but it has not really made us more secured. Knowing that we have the most powerful military in the world has led us to erroneously believe that we have the right to intervene militarily anywhere and everywhere at whim. In many cases, even though other countries can deal with the crises, they just find it convenient and less costly to let the well-armed (and always eager to oblige) Yankees do it. There is so much money lying around at the Pentagon that they don't care if they paid $500 for toilet seats or $100 for hammers. During the Iraq war, billions of dollars of cash simply vanished in thin air (even today, it's unaccounted for) or paid to the contractors without any proper paperwork (so nobody can tell what services were provided by those contractors). I think we need a debate in this country on what should be the mission of our ever-growing military? Is it to defend our borders or to have a global presence so that we can intervene in any conflict anywhere in the world (even if our security is not threatened)? Once we know the answer to that question, then we will know what is the right budget for the Pentagon. Regardless, President Obama's suggestion to reduce the Pentagon budget by over $100 billion is nowhere near what it could be.

· Social Security: Increase the income limit for Social Security tax from $106,800 to $150,000, but keep the full retirement age at 66, as it is now.

· Medicare: Increase the income limit for Medicare tax from $106,800 to $150,000, increase the Medicare tax rate from the current 1.45% to at least 3%, increase the annual out-of-pocket deductibles, impose limits on annual and life-time benefits, strengthen the provisions that would give Medicare a free hand to negotiate lower rates for hospital stays, drugs, and doctor's services, and allocate more funds for investigating and prosecuting Medicare related fraud.

· Medicaid: Cut the overall budget by 30% - Cover only serious illnesses (for routine care, the patients will be on their own except for children), impose limits on annual and lifetime benefits, and allocate more funds for investigating and prosecuting Medicaid related fraud.

· Reduce the federal bureaucracy by reorganizing the federal government structure. Here are some examples: Combine Commerce and Labor Departments covering the issues related to business and labor; combine Interior, EPA, and Energy Departments into a single Department; close-down HUD, etc.

· Financial and military foreign aid programs should be reformed. We should cut back on who receives such aid and for how long (aid to Pakistan is a sheer waste of tax dollars and Israel has become a permanent recipient even though Israelis' living standard has vastly improved in recent years). A chunk of this aid ends up in secret Swiss bank accounts of the leaders of these countries. Rather than giving cash, we should give them material and provide services procured from American companies that will minimize the opportunity for the leaders of the receiving countries to embezzle the aid money; also, this approach will also help American businesses and possibly help create more jobs for Americans.

· The budget should be thoroughly reviewed and all programs that are deemed ineffective should be eliminated altogether. When Congress approves a new program, the legislation should also require periodic mandatory evaluations and specify under what conditions the newly enacted programs could be phased out.

Ryan's proposed budget: A plan for "prosperity" or "hell"?

2011-04-17T17:46:00.006-04:00

Posted by Shyam Moondra

President Ronald Reagan pursued trickle-down economics by cutting taxes for the rich in the belief that prosperity of the people at the top would trickle down to the people at the bottom of social strata. It didn't and President Reagan left a huge budget deficit and rapidly increasing national debt. President Bill Clinton raised taxes for the rich, in spite of fierce opposition from Republicans who predicted that higher taxes would lead to economic recession. It didn't lead to recession. Instead, we had one of the most enduring periods of economic vitality full of innovations made possible by venture capital that created over two million high-paying jobs and the stock markets reached to all-time highs. President George Bush increased spending to finance two wars that he initiated, got the Congress approve large tax cuts, especially for the rich, and spent a huge amount of tax dollars to bail-out the financial institutions. Bush's actions led to record high budget deficit and national debt that he handed over to President Barack Obama. Last week, the Chairman of House Budget Committee, Rep. Paul Ryan (R-Wisconsin), managed to have the U.S. House of Representatives, controlled by Republicans, approve his 2012 budget plan that slashes spending, largely targeted at senior citizens, children, and poor people, while cut taxes for the rich individuals and corporations. Will the third time be a charm for trickle-down economics? No way, no how!

Here are some observations on the Ryan's plan:

· About 90% of the people, especially low-income and middle-income people, will be hit the hardest while 10% of the richest people would come out ahead. The Ryan plan would create the worst class-warfare we have ever witnessed in the U.S. history.

· The middle class is the fuel that feeds our economic engine. The Ryan plan, which is lopsidedly anti-middle class, would scuttle the economic recovery currently underway and lead to higher unemployment right around the 2012 election time. May be that's what Republicans have in mind because the voters tend to punish the party in power in the White House for any economic ills.

· The biggest spending cut would come from privatization of Medicare. This will cause an unprecedented cost shift from the government to the senior citizens who can least afford. The proposed changes in Medicare would lead to millions of senior citizens joining the ranks of uninsured, while the insurance companies would reap windfall profits. The negative economic consequences would go beyond senior citizens and would be borne by their children who would have to deal with the cost shift to senior citizens. The extreme economic severity of the proposed Medicare changes would undoubtedly lead to an increased number of suicides among the depressed millions of sick senior citizens.

· The Ryan plan is proposing drastic cuts in Medicaid, education, childcare, food-stamp program, EPA funding, and in Obama's initiatives such as infrastructure, energy, and high-speed train system. No one has even bothered to figure out what would be the social consequences of these unprecedented cuts. The college bound U.S. students are already among the bottom of the top twenty-five countries and cuts in student financial aid will only accelerate this decline that will have negative impact on our competitiveness in global trade.

· The Ryan plan wants to lower corporate taxes. Recent reports indicate that GE paid zero income tax, Google paid only 2% in taxes, and Goldman Sachs paid only 10% in taxes. Today, in a multi-national environment, most U.S. companies have empty offices (in some cases just mailboxes) in tax havens and they move money around the globe to hide their profits from the U.S. regulators. The top corporate tax rate my be 39%, but most companies pay far less than that, so what do we really accomplish by giving more tax breaks to the companies that do not pay their fair share of taxes to begin with. The focus should be more on closing the tax loopholes and making sure that the multi-national companies pay their fair share of taxes.

· The Ryan plan is not a well thought out plan. It is so imbalanced and unfair to the vast majority of the people that it would lead us all to "hell" and not to "prosperity" as Republicans have been advertising.

President Obama has proposed his own budget plan which includes tax increases for the rich, reforms of Medicare and Medicaid programs, and investments in education, infrastructure, alternative source of energy, and high-speed train system. This plan also cuts defense spending by $100 billion over and above what Defense Secretary Gates has already put in motion. Given that the Pentagon is a wasteland of tax-dollars (more dollars don't necessarily buy more security), it is appropriate to expect the Defense Department to also bear the brunt of spending cuts like everybody else. The Obama plan incorporates both tax increases (25%) and spending cuts (75%) that seem to be more balanced and prudent. The tax increases could be higher, but President Obama is mindful of not overdoing it because that might put economic recovery at risk.

Between the two plans, President Obama's plan is more realistic and a clear winner compared to the plan proposed by the Republicans. When the debate begins over these two competing plans and the Congressmen and Senators start hearing from their constituents, it will become abundantly clear that the Obama plan is indeed politically viable and the Ryan plan is dead-on-arrival.

For renewed prosperity, we need to balance the budget by 2015

2011-03-27T13:58:00.019-04:00

Posted by Shyam Moondra

Since President Bill Clinton balanced the budget during his second term, the federal budget deficit has steadily grown during the last decade. President George W. Bush scaled up defense expenditures to finance twin wars in Iraq and Afghanistan and to deal with the financial crisis via Troubled Asset Relief Program (TARP). President Barack Obama piled on by undertaking a huge stimulus program to revitalize the economy and a comprehensive health care program that will provide subsidized health care (at a cost of $1 trillion over ten years) to millions of people who couldn't afford to buy health insurance. Today, our national debt stands at $14.2 trillion ($46,000 per American), which is roughly 96.3% of the present GDP. The interest on the debt alone is around $420 billion a year. The current federal budget deficit is running at around $1.4 trillion. Clearly, these levels of debt and budget deficit are unsustainable. Recently, President Obama proposed his budget for the 2012 fiscal year that envisions the budget to be balanced in ten years.

High-levels of deficits and debt are big obstacles in achieving full economic recovery because they will propel the interest rates to elevated levels for an extended period of time and thus have negative effect on economy. Also, they would weaken the dollar currency that will make imports expensive and thus fuel an inflationary spiral. Some extreme economists even predict that the U.S. government may be headed to bankruptcy or at a minimum faces a possible downgrade of its debt rating that will further increase the interest to be paid on the national debt. There is a general agreement among Democrats, Republicans, and Independents that projected debt and budget deficit are dangerously high and they must be brought down or else younger generations will face declining living standards. However, philosophically, they disagree on how to bring the debt and deficit down and how quickly. Liberals believe that rich people should be asked to pay more in taxes, conservatives believe that the government has grown uncontrollably big and it's time to cut spending, and then there are moderates, who believe that any viable political solution would have to incorporate both spending cuts and tax increases. Recently, a bi-partisan Presidential Debt Commission recommended a wide range of options that included both spending cuts and tax increases. However, the commission got bogged down with disagreements among the members based on their political party affiliation and different ideologies.

Here are some general observations:

· Morally, it's wrong for the government to year after year spend more than tax revenues. It's like living a good life with money borrowed from the future generations.

· The problem is urgent; we cannot wait for ten years, as President Obama has proposed. The ten-year target may have been an opening tactical move by President Obama just as Republicans have thrown out an opening gambit of balancing the budget immediately. Rather than engaging in a political brinkmanship, President Obama needs to provide leadership on this issue and strive for a compromise that would balance the budget in 3-4 years.

· The budget deficit is too large to be balanced strictly based on spending cuts. Besides, sharp spending cuts would undoubtedly hurt the low-income and middle-class people disproportionately more than the rich people.

· Some conservatives want a constitutional amendment that would put an absolute limit to national debt. That's a bad idea. The government needs the flexibility to raise money at a fast clip if some unforeseen national emergency arises caused by natural disasters or man-made disasters such as nuclear accidents or catastrophic situations similar to the recent financial meltdown that required the federal government to bailout major financial institutions.

· If our national finances continue to deteriorate, our military power would also erode over time and we will be put on the same path of decline as the former Soviet Union. Strong national finances are a must for us to remain strong militarily. If we continue with a policy of high deficit and debt, in a short period of a few years, we wouldn't be able to finance unexpected national security campaigns such as the current military action against Libya.

· Social Security and Medicare programs are like insurance policies for which the participants pay premiums in the form of payroll taxes. As such, they are entitled to the benefits provided under those plans. Therefore, any reforms with respect to these programs should not contemplate reducing the benefits. If any changes are made to these plans, they should be limited to the revenue side of the equation.

· While we look for ways to cut government expenditures, it's important that we also continue to invest in the future, especially in the areas of alternative energy sources, infrastructure improvements including high-speed transportation, and education in which we are losing ground fast (in a recent college entrance test, the U.S. students ranked near the bottom of top 25 countries).

Below are some suggestions on how to raise tax revenues and cut spending to balance the budget and reduce debt.

Tax Reforms:

· We need to enhance tax revenues by increasing the federal income tax rates on the rich people, who benefited the most under the Bush administration. In fact, even rich people like Warren Buffet have said that their tax rates are too low. Recently, President Obama agreed to extend Bush-tax cuts for two years for everyone. When this extension has run its course, the tax rates for the rich should go back to where they were before President Bush cut those rates while the cuts for the rest of the people should be made permanent.

· We need to close the corporate tax loopholes; when GE pays zero income taxes or Google pays only 2% of income in taxes or Goldman Sachs pays only 10% in taxes, something is very wrong with the tax code. We need to simplify the tax code by eliminating most special-interest deductions accompanied by reduction in the overall tax rate for all businesses.

· The current Social Security tax rate is 6.2% and Medicare tax rate is 1.45% of incomes of up to $106,800. The income limit should be gradually increased to at least $150,000, while keeping the percent rates at the current level. Also, many rich people who do not receive salary (and thus do not get any W-2 forms) should still be levied Social Security and Medicare taxes at the highest limit level (e.g., $150,000) because taking care of the elderly in the society should be considered as a collective responsibility; of course, these rich people without W-2 forms should also be entitled to the Social Security and Medicare benefits if they so desire. No change should be made in the retirement age and the benefits.

Spending Cuts:

· A serious consideration should be given to completely eliminating certain departments such as Commerce, Energy, EPA, HUD, etc. Some of their functions could be absorbed by the other departments. For example, we could combine Commerce and Labor into one department representing businesses and unions, and Energy, EPA, and Interior could become one department.

· We need to look at government employee benefit costs, especially the retirement and health care benefits. Many of these plans offer better benefits than those of the private sector. For example, members of Congress enjoy very generous retirement and health care benefits. I think time has come for the government to follow suit the private sector and reduce benefits and make government employees pay more for those benefits.

· The government procurement procedures should be tightened up to reduce fraud and corruption. The Defense procurement process could be improved to save billions of dollars a year.

· The government should eliminate or sharply curtail "free" programs such as Medicaid that suffer from widespread fraud. The eligibility requirements should be made more stringent and benefits should be reduced (impose a maximum for the year and life-time benefit, start collecting deductibles, etc.). We also need to increase resources for catching and prosecuting criminals engaged in fraud.

· Financial and military foreign aid programs should be reformed. We should cut back on who receives such aid and for how long (aid to Pakistan is a sheer waste of tax dollars and Israel has become a permanent recipient even though Israelis' living standard has vastly improved in recent years). A chunk of this aid ends up in secret Swiss bank accounts of the leaders of these countries. Rather than giving cash, we should give them material and provide services procured from American companies that will minimize the opportunity for the leaders of the receiving countries to embezzle the aid money; also, this approach will help American businesses and possibly create more jobs for Americans.

· The budget should be thoroughly reviewed and all programs that are deemed ineffective should be eliminated altogether. When Congress approves a new program, the legislation should also require periodic mandatory evaluations and specify under what conditions the newly enacted program could be phased out.

We are in a secular bull market - DJIA headed to 18,000

2011-03-14T11:30:00.009-04:00

Posted by Shyam Moondra

The economy has been steadily picking up with industrial production, retail sales, consumer confidence, productivity, and GDP, all gradually increasing. Even unemployment has begun to decline, albeit slowly. The housing market continues to be a laggard, however. The corporate profit margin is at 18-year high and the corporate balance sheets show a record cash hoard of close to $2 trillion.

The revolution sweeping the North African region has reduced the oil output, especially in Libya, pushing the oil prices to $105 per barrel. However, the oil-rich countries need the oil revenues to keep the services in high gear to appease the raged population. Regardless of who is in control in many of these countries, oil will continue to flow and oil prices will eventually come down. In Japan, earthquake and tsunami devastated the eastern part of the country, but the disaster spared the major industrial cities and thus any harm to Japan's overall economy will be short-lived.

Much has been made of the record appreciation in the stock prices over a short period since it hit the bottom in March of 2009. However, what is not receiving much attention is the fact that in 2009 with the demise of Lehman Brothers, takeover of Bear Stearns and Merrill Lynch, and rumored bankruptcies of major banks, the market went down precipitously more than it should have. When it became clear that the major banks wouldn't go bankrupt after all (thanks to TARP), the market bounced back. The market would not have gone down as much as it did, had the investors not panicked. Therefore, the 30-40% appreciation from the bottom should not even be counted as appreciation; it was simply backtracking of an overreaction.

Today, the market is hardly overvalued, as some analysts suggest. The trailing PE of S&P 500 is only 17 and forward PE is under 15. There is no euphoria in the market as we usually see when the market is overvalued. The trading volume continues to be sluggish. During the financial crisis, corporations did an outstanding job in improving their cost-structures that made it possible for them to reap record profit margins and accumulate cash of the order of $2 trillion. The corporate world has never been more financially stronger. The companies are very well positioned to increase dividends and undertake major share buy-back programs that will be a big boon to the current investors. Also, relatively low PE levels will fire-up the mergers and acquisitions market, further boosting the stock prices.

What will help the economy is a bi-partisan effort to reduce federal budget deficit and national debt. President Obama's proposed budget is utterly inadequate. We need a 3-4 year plan to balance the budget and not a 10-year plan. A serious effort by the Congress and the Obama administration to reduce the budget deficit is a pre-requisite for sustained recovery and long-term prosperity.

Any talk of big market correction is pre-matured. The market has a long way to go before we see irrational exuberance. If the housing market turns around and a plan is adopted to reduce the budget deficit in a meaningful way, the DJIA could top the old high of 14,198 by next year. We might see intermittent small corrections caused by profit taking, but we are in a secular bull market, which may last for several years until S&P 500 PE reaches to high-20's and DJIA hits 18,000. Warren Buffet recently said that he is itching to buy; his purchase of Lubrizol for $9 billion is just the beginning. When Buffet is bullish on America, any talk of a major market meltdown is pure nonsense.

Tsunami of revolution sweeping through the Arab world

2011-02-27T16:31:00.006-05:00

Posted by Shyam Moondra

Abraham Lincoln's epic words "government of the people, by the people, for the people" are finally ringing true in the ears of the Arabs. A protester in Cairo, Egypt pointedly asked "if the United States can have a new president every four years, why can't we?" The revolution that began in a tiny country, Tunisia, quickly became a tsunami of revolutions sweeping through the North African continent.

What happened?

The revolution began in Tunisia that was ruled for 23 years by a ruthless dictator named Zine Ben Ali, who colored his hair to mask the fact that he oppressed his countrymen for such a long time. On December 17, 2010, a 26-year old street fruit vendor, Mohammed Bouazizi, got upset when a local municipal official confiscated his weighing scale to extort bribe from Bouazizi. When he complained, the female official slapped him. This made Bouazizi so mad that he poured gasoline on himself and set his body on fire. He later died and the news spread among the youth like a firestorm over Facebook and Twitter and thus began the revolution. The people took offence at the indignity that Bouazizi suffered at the hands of a corrupt government official.

Tunisia's revolutionary fireball quickly spread to neighboring Egypt, which was also suffering from the same problems of corruption, nepotism, and oppression under President Hosni Mubarak. After eighteen days of massive protests, Mubarak, who ruled Egypt for three decades with an iron fist, resigned. Protests spread to major cities of Jordan, Bahrain, Yemen, Libya, Algeria, and Oman. Jordan and Bahrain promptly sacked the governments and offered concessions but those proved to be inadequate and protests continued. The people wanted fundamental changes in the constitution that made the governments accountable to the people. The revolution turned deadly in Libya that has been ruled over forty years by erratic madman, Muammar Gaddafi, who is still fighting to remain in power by promising a bloody civil war. Inspired by all this were an attempt by the Iranian opposition to wage a protest in Tehran and a feeble attempt at "jasmine" rally in China. Nevertheless, the dam of oppressive regimes in the Middle East and elsewhere is crumbling down and it's just the beginning of a painful process of establishing a new world order.

Why now?

While the incident of self-immolation in Tunisia lit the powder keg of revolution, the suddenness of the revolution and its intensity caught everybody off-guard. The people in the region have been living under dictatorial rule for decades without any political freedom. However, the younger people (that now account for a majority of the population) were restless because of chronic high unemployment and lack of opportunities for realizing their dreams. The rampant corruption among the officials at the top, who were enjoying lavish life-style, was deeply resented by the population at large. The youth seized the moment and used Facebook and Twitter to galvanize the revolution. Thanks to Internet, the youngsters were more knowledgeable about how the kids lived and what they did in developed countries, and they very much wanted to emulate those life styles. The older generation was also unhappy but they were too afraid to speak up in a police state. However, when they saw the brave young people protesting in masses, they overcame their fear and felt like they had nothing to lose. This seemed like a scene from the 1976 movie "Network" in which a deranged TV news anchor (played by Peter Finch) fed up with his life went hysterical during a live broadcast, asking people to go to their windows and scream "I'm mad as hell and I'm not going to take this any more." The protests were not fueled by any Islamic fundamentalist groups; so it is unlikely that Iran-like religious mullahs would take over the new governments, as feared in the western countries. This revolution is in its truest sense a revolution of the masses across all faiths and ethnic groups and not driven by any particular anti-western group.

What does this mean?

Islamic radicalism will decline: The stereotype fear is that Islamic radicals will takeover the freed countries, in the mode of Iran. That appears to be very unlikely. The revolts are being driven by generally younger people who are more adapt with the modern world and technologies and all they want is more opportunities for themselves. The younger generation doesn't subscribe to the old rigid Islamic rules. Besides, they will be busy rebuilding their countries, so they wouldn't have time for radical indoctrination.

Al Qaeda will become irrelevant: Al Qaeda had it easy recruiting brain-washed young followers because of their anger at the Western countries that supported dictatorial regimes in the Middle East. Now that those regimes are crumbling, these young people are in control and thus they don't need Al Qaeda to fight for their cause. These young people, relatively more educated than the rest of the population, have more at stake and they would rather work collaboratively with the Western world on technologies, education, and trade so that they can improve their own living standards.

Free-market principles will take hold: The democratic governmental institutions and empowered younger people will lead to non-orthodox attitudes and approaches, fueling faster modernization of many of these backward countries. They will derive lessons from such democracies as India and Brazil that achieved spectacular economic growth and technology prowess with free-market policies.

Trade opportunities for industrialized countries will increase: Democratic institutions and reduced corruption will lead to more active participation of industrialized countries in trying to help these backward countries with their development efforts that will create more trading opportunities with them in the future. The Obama administration should be pro-active in helping the younger generation in these countries to modernize their countries.

How did Obama do?

President Barack Obama and the U.S. intelligence apparatus got caught off-guard by the suddenness of the revolution and the speed with which it spread throughout the North African region. By and large, Obama handled it very well. He expressed support for the people who wanted democracy and more freedoms and warned the rulers against using violent means to suppress peaceful protests. Obama's job got a little complicated with respect to Egypt, which was ruled by Mubarak, a close ally of the U.S. and Israel. However, in the end, Obama had no choice but to support the desires of the Egyptian people. Obama even leveraged our close military-to-military ties to nudge them to be more forthcoming with the necessary constitutional changes to satisfy the demands of the people. In Libya, when Gaddafi released weapons to his supporters and brought in African mercenaries to violently stop the protesters, some Republican conservatives criticized Obama for not taking more direct military action against the Gaddafi regime (such as imposing no-fly zones). I think Obama was right in not injecting the U.S. military might in the midst of a civil war because the minute he did that, the Islamic fundamentalists would have redirected the revolution and turned it into an anti-American campaign. The people in that region have to earn their freedom by themselves without a direct intervention by any outsider; only then, the revolution would endure, have a lasting impact, and it would be legitimate. In any case, Europe has far more at stake in Libya, especially Italy, than the U.S. Therefore, if there is a need for outside intervention, it would have to be in the form of a multilateral effort. Obama could have given a stronger moral support to Libyan revolutionaries and called for Gaddafi's departure sooner than he did; however, given the fact that there were thousands of Americans stranded in Libya, Obama needed to lay low to get them out first before taking a harder stand against Gaddafi. All in all, Obama provided a calm and wise leadership and he should be given high marks.

Who is next?

When one stops fearing fear itself, impossible things become possible. The revolution that started in Tunisia will resonate with the people throughout the region and beyond. What has happened in the last few weeks would make other countries ponder about their own destiny more diligently than ever before. It's natural for all humans to have a desire to be free and to feel empowered to shape their own future. Therefore, it's unlikely that a revolution of this magnitude would just fade away. In coming weeks and months, we will undoubtedly see more of this in such countries as Syria, Saudi Arabia, China, Venezuela, Russia, Cuba, and North Korea. Each country will come up with its own version of democracy, hopefully with more freedoms and rights for the people than they have today.

Back to the Future

2010-11-27T19:22:00.010-05:00

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.

Need targeted tax incentives to give a boost to the fragile economic recovery

2010-09-01T07:24:00.002-04:00

Posted by Shyam Moondra

There are clear indications that the U.S. economic recovery is stalling. There is no danger of a double-dip recession, but the economy could use a boost from the government. Any new stimulus would have to be in the form of targeted tax incentives and not major spending programs that tend to be inefficient when it comes to creating jobs.

Given the present high budget deficit, a large-scale spending program is politically infeasible. Instead, what the Obama administration could do is to let the Bush income tax reductions for rich people (making more than $250,000 a year) expire on January 1, 2011 and use the increased tax revenues to provide targeted tax inducements to the businesses and consumers with the twin objectives of increasing employment and consumer spending. Here are a few examples of tax incentives:

· Offer temporary one-year holiday from payroll taxes to employers as an inducement to hire more people.
· Temporarily increase tax credit for new capital investments by businesses.
· Put on hold certain parts of recent financial and health care reforms that would increase the costs to the businesses, contingent upon their hiring more workers.
· Re-offer tax incentives for buying new homes and cars and making homes more energy efficient. These programs were successful the first time, so they are worth repeating again for one more year.
· Work with states to have a holiday on sales taxes for, say, six months to induce consumers to spend more, with the federal government partially reimbursing the states for the lost sales tax revenues.
· Rather than extending unemployment benefits, offer temporary jobs to the unemployed people who could work on various public projects.

Market manipulation scaring small investors away - need trading reforms

2010-08-22T12:09:00.013-04:00

Posted by Shyam Moondra

New York Times reported that small individual investors pulled out staggering $33 billion from the mutual funds in the first seven months of this year and invested that money in bonds that are considered relatively safe. It is estimated that individuals have over $8 trillion parked in bonds, gold, and Treasury securities. This unprecedented abandonment of stocks is motivated by many factors:

• The wounds from 40-50% losses caused by the market crash of 2007-2008 are still fresh. At the slightest sign of market weakness, these risk-phobic investors look for an exit.

• Recent slowdown in the economy has raised doubts in the minds of many investors about the sustainability of the recovery. Some are convinced that we are headed to a double-dip recession, as happened during the depression of the 1930’s.

• In recent years, the stock market has become very volatile; the stocks move up and down without any significant reason. It is a widespread belief that the markets are manipulated by institutional investors through their frantic computerized trading.

The investment banks and hedge funds short sell a stock to push it down (often spread false rumors about the targeted company to aid the process of bringing it down) while also trading in options. Then just before the monthly options are to expire, they start covering their short positions and push the stock up. In the process, they may lose some money in trading stocks but they make proportionately more money in options and thus come out ahead. Sometimes they move a particular stock up or down to make the options they wrote worthless and thus pocket the premium the buyers paid. They repeat this process every month in many targeted high-beta stocks and make money at the expense of small investors. Some of these big players also use what is known as "pump-and-dump" strategy in which they take substantial long position in a company, usually a lesser-known small-cap company, and then publish inflated views or research reports about those companies that help move the stock price up ("pumping"), enabling them to sell their holding (“dumping”) at a profit. Some times these big players also use their research departments to make money in their trades. As an example, research departments of some investment banks were touting that oil was headed to $200 per barrel while at the same time they reportedly held long positions in oil through their energy hedge funds. The investment banks and hedge funds call the above trading practices as "investment strategies" and deny that they are engaged in unlawful manipulation. The fact is that if a market player can make a stock or commodity move in a certain direction at will, then that's manipulation.

More recent form of market manipulation is called "quote stuffing." The SEC is reportedly investigating the practice of day traders in which very large numbers of buy or sell orders are placed and canceled almost immediately. It is also reviewing another practice known as "sub-penny pricing," where orders are priced in increments smaller than a penny, but are far from the price at which the stock is trading. Yet another manipulative practice is to initiate buy or sell orders for 100 shares at a time at successive higher or lower prices at a rapid pace to make it look like a trend is emerging, which, in turn, induces other investors to place their bets. These trading practices are very easy to execute with the advent of high-speed computers. Some of these practices may have played a role in the May 6th "flash crash," a panicked disruption in trading that saw the DJIA drop hundreds of points in minutes.

The stock markets were created to help companies raise capital so that they could build new factories and hire more workers and the stock prices moved up or down based on the company fundamentals. Now the markets move up and down in a yo-yo fashion without much change in the underlying fundamentals. The increased volatility caused by market manipulation has turned the markets into gambling casinos that has made small investors desert the equity markets altogether.

We urgently need new regulations to stop market manipulation by the investment banks and hedge funds. The government has already taken some steps in the financial regulations bill such as close oversight of hedge funds, restrictions on proprietary trading by banks, higher capital ratios required for banks, and a total ban on naked short selling that should help reduce the market volatility. However, to lure small investors back to the equity markets, more needs to be done:

• Ban "quote stuffing," "sub-penny pricing," and other computerized trading schemes designed to manipulate the markets.

• Investment banks and hedge funds must be required to hold stocks they buy for a certain minimum period (e.g., for three business days until the trades have been settled) before they can sell those stocks. This will reduce computerized day-trading and induce investors to invest rather than speculate.

• Impose higher taxes (as high as 50%) on profits realized from short-term trading.

• The investment banks must not be allowed to own research business. Currently, they have arm's length relationship between their trading and research departments but that is not enough.

• Pass tough laws to discourage "pumping-and-dumping" so that big players can't make money at the expense of unsuspecting small investors. Strengthen SEC resources to investigate and enforce the laws vigorously to stop market manipulation. The CEOs of the companies that are found to violate any of the new regulations must be given mandatory jail terms and their companies must be fined heavily to discourage them from manipulating the markets.

• Change the tax laws to stop investment banks and hedge funds from escaping from paying their fair share of income taxes. In a recent quarter, a major investment bank paid only 10% in taxes because it reportedly executed its trades through a complex web of off-shore subsidiaries and hedge funds that made it possible for it to reduce the tax levies. It's time we close all these tax loopholes.

Extend the Bush tax cuts for one more year and then gradually eliminate them for the super rich

2010-08-19T12:04:00.004-04:00

Posted by Shyam Moondra

In 2001, at the height of relative economic prosperity, President George W. Bush pushed for and got enacted unprecedented income tax cuts since the trickle-down theory pursued by President Ronald Reagan. The Economic Growth and Tax Relief Reconciliation Act of 2001 was especially generous to the rich who benefited the most. This Act, however, had a unique sunset provision which required that the enacted tax cuts expire on January 1, 2011 unless the Congress passed a new legislation making those tax cuts permanent. So here we are with this raging debate between the Republican tax cutters and Democrat spenders at a time when our budget deficit is running at record levels. Treasury Secretary Tim Geithner has said that making the Bush tax cuts for the super rich permanent would be a perpetual $600 billion-a-year mistake.

First, the timing of the original tax cuts and now making those cuts permanent seem very odd. The Bush tax cuts were enacted when economy was doing well. When economy is doing well, one would expect to increase taxes to thwart inflationary pressures and to raise tax revenues to reduce budget deficit and national debt. This is what common men would do - when they feel financially secured, they pay off their debt. Now, at the present time, when economy is not doing so well, one would expect that taxes be kept low to induce consumers to spend and keep the economic recovery alive. At the same time, given the record budget deficit and mounting national debt, one would argue that at some point taxes would have to be raised or else we would put our national credit rating at risk, in the mode of Greece-like crisis. If the deficit and debt problems are not addressed in a credible manner, the government will be forced to take stern cost cutting measures in the future that would trigger civil unrest and interest rates will go through the roof creating economic malaise for years to come.

It’s clear that the Bush tax cuts were ill-timed. It’s also clear that canceling those tax cuts right now will most likely push us into a double dip recession. Therefore, it seems sensible to extend the Bush tax cuts for everyone for just one more year and as the economy recovers, those tax cuts should then be gradually eliminated, first for those who are making more than $250,000 individually ($500,000 for family) and then in subsequent years for those who are making between $100,000 and $250,000 individually ($200,000 - $500,000 for family), while making tax cuts permanent for the rest of the taxpayers. This gradual approach will keep the current economic recovery going, increase tax revenues to reduce federal budget deficit and national debt, and bring fairness to our tax code which was heavily tilted in favor of the rich under the Bush presidency. Republicans’ desire to make the Bush tax cuts permanent will only add to the already record high budget deficit. While the Obama administration and Congress should also look for ways to cut government expenditures, the humongous deficit will undoubtedly require a combination of both reduced spending as well as tax increases. President Obama needs to show leadership and hammer out a compromise on gradually canceling Bush tax cuts for the rich and reducing expenditures. It’s important to note that President Bill Clinton’s efforts to achieve a balanced budget was instrumental in our sustained prosperity that eventually led the stock markets to record levels. At this critical juncture, we need to replicate the Clinton strategy to ensure our prosperity for the next generation.

To breakup the economic logjam, the FED should start raising interest rates now

2010-07-06T09:03:00.013-04:00

Posted by Shyam Moondra

The stock market is in a downward spiral, again. However, the trading volume is low, indicating lack of conviction. The market is going down not because investors decided to dump the stocks they own but it's more because of lack of liquidity caused by investors' unwillingness to take risk. They are choosing to keep their cash in bank accounts or in Treasury securities earning a meager rate of return. Some are rushing to buy precious metals. On a valuation basis, stocks are very cheap with a forward PE ratio of less than 10.

The U.S. economy is in a logjam with conflicting crosscurrents. The unprecedented financial crisis of 2007-2008, which witnessed the demise or near demise of well-known financial institutions, forced the Obama administration and Federal Reserve Board to take stern actions to provide immense liquidity in the form of a stimulus program, near-zero federal funds rate, and other federal credit facilities. The aggressive moves by the government were effective in stabilizing the financial system. However, the financial institutions became risk-phobic that led them to become overly cautious in lending, especially to small businesses that create many jobs. In fact, the banks acquire funds at very low interest rates and earn a tiny return by investing those funds in the Treasury securities. The banks are content with a small return rather than lend and potentially earn much more but at much higher risk. Lending lubricates the economic engine; however, the current liberal FED rates and credit facilities are in fact inducing the banks to not lend.

Corporations have a record $1.8 trillion cash on their books but they are reluctant to spend on capital projects because they are not sure how the new regulations that the Obama administration pushed through the Congress would affect their profitability. There is always a chance that some of these complex regulations may lead to unintended consequences in an unpredictable way. The uncertainty created by upheaval in the regulatory regime is making them very cautious in making risky bets on adding capacity or hiring more people, beyond what's needed to replenish the depleted inventories.

Consumers are stunned by the rapid decline in their home prices and in the values of their investments. So they have parked their $8 trillion in bank accounts and Treasury securities that provide close to zero return. Also, they have cut down their discretionary spending to save more. The government tax credits to replace old cars or to buy new homes or to make their homes more energy efficient did provide a temporary burst of consumer activity but all these programs have now ended or are coming to an end. The slow pace of improvement in the job outlook is also discouraging the consumers, making them cautious when it comes to making the big-item purchases. Consumers are also not sure how the health care and financial reforms would affect them. They hope these reforms would reduce their costs, but they are not convinced that they would.

The government is in a fix without any good options. With the rampant budget deficit and national debt, the federal government is not in a position to undertake another large stimulus program that could significantly add to the deficit. Also, many analysts are not convinced that huge government expenditures are the most efficient way to create jobs. On the monetary side, the FED has already reduced the interest rates to almost zero and there is not much they can do on that front. They could buy government securities on the open market or troubled assets from banks to increase money supply but that could spark inflation.

After the crash of financial markets in 1979 and 2001, various publications declared investment in equities as dead, forever. But we know that both times markets came back roaring and they set new record highs. This time would be no exception. Here is what the government can do to speed up the economic recovery:
· The FED should start raising interest rates immediately and lift the fed funds rate to at least 2.5% over the next twelve months and wind down all credit facilities they created to deal with the financial meltdown two years ago. Easy money usually fires up the financial markets, home buying, and business and consumer spending, but this time it's not working out that way. The people are fearful of easy money (that's bound to form a bubble), government regulations, and mounting deficit. So the FED might start raising the interest rates now to induce banks to actively lend again rather than park their funds in risk-free Treasury securities.
· The Obama administration should refrain from starting any new major stimulus program. It's not needed; the U.S. economy is resilient and it will bounce back on its own without any external stimulus. The perceived benefits of any new stimulus program are outweighed by the risks posed by higher deficits and national debt.
· The Obama administration should come up with a credible plan to reduce budget deficit and national debt soon. Any delay in proposing this plan would be negative for the financial markets and would push the long-term interest rates higher that would undermine the economic recovery.
. President Obama needs to do a better job in convincing the people that the recent financial and health care reforms would indeed reduce costs and revitalize the economy.

The stock market decline is driven by fear and misconceptions

2010-06-07T20:25:00.004-04:00

Posted by Shyam Moondra

The stock market is in a downward spiral. Since April 26, 2010, when the market set the 52-week high, DJIA has declined over 12%. After having risen 74% from the crash bottom set on March 6, 2009, it was expected that the market would have a correction. However, the intensity of decline (as much as 25-30%) in the prices of shares of some of the companies in the financial and technology sectors is baffling. The market decline lacks conviction given the relatively light trading volume. The market sentiment has become overly negative, which may be a sign of the market bottom. Every little bad news gets overblown and good news gets discounted. In the last couple of quarters, the economy has been recovering steadily as is evident by the statistics on corporate profits, industrial production, leading indicators, consumer confidence, retail sales, and housing. The numbers on inflation have been very positive. When did stock market decline in an environment characterized by increasing corporate profits, low interest rates, and low inflation?

At the present time, the investors have lost confidence in the strength of the economic recovery, largely based on fear and misconceptions. Here are some observations:

· When an economy comes out of recession, it does not recover in a straight line. Initially, it's always a slow process consisting of two steps forward followed by one step backward. That's quite normal as the economy goes through the phases of structural adjustments during the post recovery period.
· The Europe debt problem is being blown out of proportion. The U.S. banks have no more than $60 billions worth of exposure to Europe, which is like a drop in a bucket, considering the size of the total assets of these banks. It's doubtful that there will be any defaults on sovereign debt, so long as the countries are prepared to tighten their belts and IMF is ready to help them out. Yes, in the near-term, reduced government expenditures would slow down the European economy a little, but the budget cutbacks will have very healthy long-term impact in terms of keeping the interest rates low and in keeping the economic recovery going on a sustained basis. So what is going on in Europe is not as bad as some fear-mongers would like us to believe. In fact, today, Germany announced that manufacturing orders in the month of April unexpectedly rose 2.8% compared to the previous month; this was a good news but it apparently got lost amidst the panic driven market decline.
· In the last two months, the economy has actually created new jobs. The unemployment rate is a lagging economic indicator, so obviously this is the last category of improvement we would see as the economy recovers. The data for the current year has nothing in it that would suggest that the economic recovery is getting off track. The employment numbers reported in the coming months would prove that. While it is true that it may take a few years before we again see the unemployment rate closer to 4.5%, let us not forget that 90% of the workers are currently employed and they have done an extraordinary job in controlling their spending and saving more during this recession than any other prior recessions.
· The corporations have $1.5 trillions cash on their balance sheets, which is a record. Some of this cash will end up in capital investments that will create new jobs. The corporations did a very good job in controlling their costs throughout this recession (via low inventories and painful work force reductions); as a result, the productivity gains would contribute to their higher profit margins as the economic recovery gains momentum.
· The pace of innovation picked up even during the recession, as is evident from the new products being offered by technology and other companies. There were hundreds of people waiting in lines for hours in London and Paris to get their hands on Apple's iPad. Doesn't that say loudly that one should never underestimate America? The U.S. has always been on the forefront of innovation and we will continue to dominate the world and create high-paying jobs. One has to have faith in what we can do.

Given the American entrepreneurial spirit and genius, one can never doubt where we are headed. The current pessimism and fear are misplaced. The beaten down stock prices are in fact an excellent opportunity to invest for the long-term. The market correction has run its course and it seems ready for a big up move.

Today's abnormal stock market behavior should be investigated

2010-05-06T23:26:00.008-04:00

Posted by Shyam Moondra

Today, the stock market started out on the defensive because of the continuing saga of the debt problem of Greece and other EU countries. By 2:30 pm, the DJIA was down by about 250 points. However, at around that time, the market literally fell like a rock and within minutes it was down by more than 1,000 points. But then, by 3 pm, almost like a miracle, DJIA shot up by almost 700 points and finally ended the day with a loss of about 350 points.

Early reports indicated that Proctor Gamble stock (ticker symbol PG), which is one of the 30 components of DJIA, traded at some other exchange at about 37% lower price than its last price on New York Stock Exchange. That dramatic decline in PG triggered computerized sell orders by big players that are linked to the movements of DJIA's 30-component stocks. It's not clear who placed that particular PG order. One other story appeared in the media saying that one trader erroneously placed an order to sell $15 billions worth of stock when he/she actually meant to sell only $15 millions worth.

Some analysts compared today's market movement to the crash of October, 1987. However, this time what is starkly different is that the market didn't just crash but it quickly rebounded and that raises some troubling questions.

One theory is that the above mentioned erroneous trades were in fact intended to engineer a crash so some big financial institution or hedge fund could cover their short positions or close options at a huge profit. The sharp turnabout in the market after the crash was caused by short covering by this culprit financial institution. If this theory is proven right then we can safely say that smart people on the Wall Street (who designed synthetic derivatives) outsmarted the regulators one more time.

The U.S. Department of Justice and the SEC should investigate to determine if today's sudden fall of the market was manufactured by someone to profit from the decline. The regulators also need to design a protection mechanism to prevent this kind of stock manipulation in the future. The cost of the abnormal behavior of the stock market is staggering; many individual investors got panicked and they started dumping their holdings in stocks and commodities and moved to safer investment vehicles such as gold and treasuries. The dramatic decline wiped out $1 trillion worth of equity within minutes. NASDAQ just announced that the trades in stocks that moved yesterday by more than 60% after 2:40 pm would be canceled. This may seem like the right decision, but the downside is how could investors be ever sure which of their future trades would be honored.

The overall market, having gone up from 9,800 to 11,300, was due for a correction. That correction is now largely behind us. Given excellent corporate earnings, low interest rates, and low inflation, we are in a long-term bull market which would last for several years. Today's overreaction in fact affords an excellent opportunity to buy for the long-term. We are headed to 12,000 during the summer and to 13,000 by early next year. By the end of Obama's first term in office, I wouldn't be surprised to see DJIA at a record high of 15,000.

A modern version of TV commercial: "Goldman Sachs. They make money the easy way. They stick it to the investors"

2010-04-25T08:04:00.008-04:00

Posted by Shyam Moondra

In 1986, the late actor John Houseman made a TV commercial for the investment bank, Smith Barney, which instantly became a classic. In that commercial, Houseman delivered the famous lines: "Smith Barney. They make money the old-fashioned way. They EARN it." The modern version of that commercial would be "Goldman Sachs. They make money the easy way. They stick it to the investors."

In the last ten years, the financial sector, and for that matter the entire U.S. economy, has increasingly become more speculative in nature than at any other time in history. The days are gone when stocks, bonds, commodities, and currencies would be the primary vehicles for investment. Now, the companies and individual investors can bet on all sorts of derivatives, sports events, political elections, movie box-office receipts, etc. Not only that, they can also buy the so-called credit default swaps as an insurance to protect against losses on their bets. Even individual investors are now more apt to trade in options, sell short, and engage in day trading based on short-term speculation rather than invest based on sound long-term fundamentals.

America, as a society, is increasingly becoming greedy and turning more and more to gambling. The investor's greed made it possible for Bernard Madoff to pull-off his Ponzi scheme that cost billions of dollars to the investors. Greed made corporate CEOs to fake short-term profits by sacrificing the long-term interests of their companies and walked away with millions of dollars in stock options. Gambling has made it possible for many financial giants with assets of hundreds of billions of dollars, such as Goldman Sachs, to make lots of money quickly by manipulating markets and deceiving investors, thanks to the SEC staff that were too busy watching porno websites on their office computers. But, as we all know, gambling is never a sure thing. So it has also produced dramatic falls such as Enron, Lehman Brothers, Bear Sterns, and General Motors. Excessive risk taking culminated into the crisis that brought financial ruins to millions of families and state governments, and it led to the unprecedented high levels of federal budget deficit and national debt.

Now that we have seen the catastrophe caused by the financial meltdown, the key question is could it happen again. Alan Greenspan, the former Fed Reserve chairman, said that unless a way can be found to change human nature about greed, another crisis is inevitable. As is evident from the SEC suit brought against Goldman Sachs, there is a pervasive mindset in the corporate world that they can do what they please to make money with very little regard to ethics and playing by the rule. The financial reforms proposed by President Barack Obama are a necessary first step but we also need aggressive enforcement by the SEC, CFTC, and FDIC, to minimize the chances of another financial crisis. When criminals sense that the police is not cruising the streets, they would tend to commit crimes. If the enforcement agencies were doing their jobs and the companies were fearful that they would be caught doing the wrong things and there would be consequences, may be we could have avoided some of the wrongdoings that have become so widespread in the financial sector.

Another problem in the financial markets is manipulation by the big players. Companies like Goldman Sachs with assets close to a trillion dollars have enormous financial resources that they can marshal to make the markets move in a certain way. When some stocks move sharply or are pinned down at a certain price level near the options expiry date, it's quite obvious that they are being manipulated. The big players often combine short selling, options trading, and the issuance of research reports at strategic moments to move stocks in the desired direction. They call it strategizing but it fits the definition of manipulation. The SEC knows what is happening, but so far they have been too lax in enforcing the laws.

Reforming the derivative market is critical to controlling excessive risk taking, as are the reforms in how compensation is structured for the executives and professionals. We need to go back to a reward system that encourages long-term accomplishments rather than artificially manufactured short-term profits.

It's clear that we need to strengthen regulations and enforcement of the financial sector. However, we need to do it in such a way so that we do not stifle legitimate innovations. In parallel, the corporate world must also show increased sense of responsibility and accountability for the greater good. They must go back to the culture of ethics and integrity that served us so well for generations.

Republican opposition to financial reforms is a major blunder

2010-04-14T14:45:00.012-04:00

Posted by Shyam Moondra

Republicans are being urged by the Senate Minority Leader Mitch McConnell to oppose the financial industry regulations as proposed by the Obama administration, just as they opposed the health care bill. McConnell says he wants the new regulations to prevent any future financial crisis but his tactics suggest that he is out to kill any new regulations of the Wall Street. His motive is suspicious given that he and other Republicans have been showered with handsome campaign contributions by the banks and hedge funds. He believes that by playing this double game, Republicans will be well positioned in the upcoming mid-term elections in November. He is dead wrong, just as he was on the health care legislation. The people have nothing but contempt for banks because of their greed and any-thing-goes attitude. Recent polls show that as many as 90% of the people view the financial sector negatively. They vehemently opposed the $700 billion government bailout funded with taxpayer's money at a time when individual citizens were losing their homes and jobs. It's a political mistake to take the side of the Wall Street against the Main Street in an environment where the hate for the banks is so deep rooted in the minds of the people.

McConnell wants a blanket statement put in the new financial reform bill saying that the government would never again bailout the financial sector. When it comes to governing, you never say never and limit your options in case of national emergency. In 1971, bailout was instrumental in saving Lockheed, which is a thriving defense contractor today. In 1975, the federal government bailed out New York City that saved jobs and saved the city from chaos that would have ensued if the city were allowed to go bankrupt. Last year, if the federal government hadn't bailed out the large banks, we would have had depression with unemployment running as high as 25%. Therefore, rather than saying that bailout should never be an option, we should focus more on preventing the circumstances that could lead to the need for bailouts.

The essential elements of any reform for the financial sector must include:
· De-linking the risk taking and excessive compensation.
· Higher capital ratio requirements for the banks and close monitoring of these ratios. No more 20:1 leverage that some banks have had immediately prior to the collapse of the credit markets.
· Restrictions on proprietary trading by banks, as proposed by Paul Volcker. Banks should not be allowed to own or finance hedge funds.
· Close monitoring of trading in innovative derivative products that today is normally done off exchanges without any regulations.
· Increased enforcement of the laws against market manipulation by banks and hedge funds. More powers should be granted to SEC, FDIC, and CFTC.
· A strong mechanism to protect the consumers from predatory practices of the banks.

The financial crisis, which led to the economic meltdown throughout the world, is a global phenomenon. Unless financial reforms are implemented worldwide, a repeat of the financial calamity is inevitable, given the interconnectedness and interdependence of the financial institutions around the world. If the U.S. implements the proposed reforms but other industrialized countries do not, then the U.S. banks will be put at a disadvantage vis-à-vis major banks of other countries in a fiercely competitive global arena. President Obama needs to provide more leadership in making sure that financial reforms are implemented universally and not just in the U.S.

The Republican election strategy of frustrating any financial reforms is unlikely to sit well with the voters, given their intense dislike for the financial institutions. The people in fact want serious reforms and restrictions on how the banks make money and treat their customers. McConnell made a mistake on the health care bill and now he is about to make the same mistake on financial reforms. The best strategy for the Republicans would be to replace their current leaders in the Congress and at the RNC.

Pessimists continue to misjudge the stock market - next stop 12,000

2010-04-11T14:45:00.011-04:00

Posted by Shyam Moondra

I predicted five months ago that DJIA was headed to 11,000 (The Moondra Post, October 31, 2009) and last Friday it did just that. Last month, I predicted that DJIA would hit 12,000 this summer (The Moondra Post, March 17, 2010) and, in spite of the dire predictions of many pessimists, I think we are headed to that level soon and even to 13,000 by early next year. The pessimism of many bears is based on miscalculations. Their arguments and my rebuttal are as follows:
· The market has gone up over 69% since March of 2009 when the market bottomed out at 6,500. While 69% appreciation may seem excessive, it should be pointed out that the market sunk to 6,500 because of the fear that financial crisis might force some big commercial banks to declare bankruptcy which never happened. In that sense, the market now is simply correcting the miscalculation that many made. At least half of the appreciation, say 35%, shouldn't even be called appreciation; it was just a reversal of the fear driven decline that in retrospect was unjustified. Even at 11,000, the stocks are hardly overpriced, given that the forward PE of 15 is quite modest. The market analysts are predicting that corporate profits this year would grow 50% compared to last year.
· The unemployment continues to be very high and thus consumers would be reluctant to freely spend in the foreseeable future. Since consumers drive the two-third of the U.S. economy, the pessimists argue that the market is running ahead of itself. While it's true that unemployment will improve only gradually, the consumers have done a remarkable job in managing their finances during this recession. They have saved more than usual and reduced their debt. That means they are not going to wait until employment has fully recovered before they start spending again. The increasing auto sales in recent months are a testament to the renewed confidence of the consumers in the sustainability of the economic recovery that appears to be gaining strength.

The pessimists neglect to take into account some very powerful forces that could unleash the growth in the coming months.
· Corporations have done a remarkable job in managing their cost-structure by staying lean-and-mean. They not only reduced the payroll aggressively, but also cut the inventory levels to the lowest level not seen for decades. Even a small pick up in demand could significantly increase their profit margins. Also, corporations have $1.5 trillion cash on their balance sheets, which is unprecedented. This cash could fuel capital investments in the coming months and years.
· The inflation expectation continues to be low because the capacity utilization is very low. The Federal Reserve Board has indicated that they would keep interest rates low for an extended period. These trends would fuel the economic growth.

Higher corporate earnings, low inflation, and low interest rates have always put the stocks on fire and this time it wouldn't be any different. The market has the potential to surpass 12,000 on the DJIA this summer and set the stage for a move to 13,000 by early next year. When market goes over 11,400 or so, which could happen as early as this week, some profit taking would be inevitable (given the market would then be up by 1,600 points from the last bottom of 9,800). But that small correction, of the order of 500-600 points, should be considered as a buying opportunity for the long-term. I wouldn't be surprised if the market set a new record high by the end of President Obama's first term in office.

Republicans should fear Obama's luck and accomplishments

2010-04-10T10:06:00.005-04:00

Posted by Shyam Moondra

Republicans are in complete disarray. They have followed a policy of "No" on cooperating with Democrats on major issues such as health care and financial regulations, but their negative policy approach has backfired. Rather than gaining popular support, the Republicans have actually lost ground. The scandalous behavior of the staff at RNC, where they went partying at strip joints and charged their RNC expense accounts, has made things worse for the party. Republicans, who take pride in family values, look like hypocrites. Campaign donors feel betrayed and that has negatively affected the in-flow of campaign contributions. Republicans also have no front-runner, who could challenge President Obama in 2012. The lack of leadership and focus within the Republican Party has splintered the party and driven many Republicans to join the ranks of the Tea Party. This division will siphon off the votes and further weaken the Republican Party. All of these Republican problems are mainly due to the absence of strong leaders in the Congress and at the RNC. It's time they replace Senate Minority Leader McConnell, House Minority Leader Boehner, and RNC Chairman Steele. Republicans also need to adopt a policy of constructive engagement and focus on solving people's problems rather than be seen as obstructionist.

Republicans have been counting on Obama's failure on major issues, but so far luck has not favored them. Obama is in fact on a roll. He got health care reform done, something that many presidents before him tried and failed to do. Obama also got TARP approved (a program initiated by President Bush), which did stabilize the banking system, in spite of the fact that American people were not in favor of using tax-payer's money to save the rouge banks. Obama got $700 bi stimulus program passed by Congress in spite of the strong Republican opposition. By most accounts, the stimulus program has worked in stopping the economic slide (cover story of Business Week, April 19, 2010). Obama successfully concluded a new SALT treaty with Russia. Some of Obama's other accomplishments include:
· Reformed the student loan program.
· Financial reforms are on their way to becoming a law.
· His aggressive Afghanistan policy is working with the Taliban and Al Qaeda on the run.
· Iraq exit strategy seems to be on track following the recent successful elections there.
· Got the first Hispanic Supreme Court justice, Sandra Sotomayor, confirmed by the Congress. Now that Justice Stevens is retiring, Obama has an opportunity to appoint another woman on the Supreme Court.
· Proposed a plan for offshore drilling, strongly favored by the Republicans. He has also provided billions of dollars in research grants for the development of alternative energy technologies.
· Initiated the work on completely reshaping the tax code by eliminating the loopholes that many rich individuals and corporations use to escape from paying their fair share of taxes. The Board led by Paul Volcker will issue recommendations by the end of the year.
· Reversed Bush's ban on stem cell research.
· Made it easier for women to sue for job discrimination.
· Extended health care to millions of children.
· Extended the National Service program.
· Set aside huge tracts of wilderness for federal protection.
· Proposed a nationwide super-speed train system.
· Provided strong leadership at the U.N. climate change conference in formulating a consensus.
· He took a small step towards Cuba by allowing family visits and remittances of money from the U.S. to Cuba. Cuba is a small and impoverished country and it is no threat to the U.S. Obama must take further steps such as dropping the trade embargo leading up to establishing full diplomatic relationship with Cuba.
· Obama gave the orders to shoot the Somali pirates and free the American hostage, dispelling many Republicans' fear that Obama is weak and he lacks resolve to deal with the evil people in the world.
· He seems to be succeeding in getting a consensus on imposing a new round of sanctions on Iran on the nuclear weapon issue. As a result of Obama's tough stance, North Korea is inching towards resuming the six-party talks on nuclear disarmament.
· Obama is showing strong leadership on the issue of eradication of nuclear weapons throughout the world by organizing a conference in Washington, DC which is expected to be attended by the heads of state of 46 countries.
· Obama has been successful in improving the image of the United States around the world, especially in the Islamic countries.

President Obama, who was initially aloof from the bill writing process, has begun to show leadership and has racked up an impressive long list of accomplishments in spite of Republican's total lack of support in a short period of just one year. The American people reward hard work and accomplishments. Even though some people may have reservations about his approach to health care reforms, but they are also mindful that we needed to take the first step on the health care issue. Republicans are miscalculating that their non-cooperation will somehow win them votes. At the end of the day, the people would want their problems solved, so it's very unlikely that they would reward those who are doing nothing. It's time Republicans stop praying for Obama's bad luck and start contributing constructively to solve nation's problems.

Obama's historic victory on health care

2010-03-22T10:23:00.009-04:00

Posted by Shyam Moondra

The health care bill just passed by the House of Representatives is a stunning victory for President Barack Obama, who steadfastly pursued this biggest health care reform since Medicare was created in 1965. Regardless of political persuasion, this has to be considered as a major personal triumph for Obama. The health care success will now breed more success on many other issues such as financial regulations, immigration, and campaign reform. Had this health care effort failed, Obama's presidency would have been crippled making it harder to accomplish anything else in the remaining three years. Obama's success at home will also strengthen his hands on the world scene in dealing with issues related to the Middle East, Iran, and North Korea.

While the Speaker of the House, Nancy Pelosi, continues to be a polarizing figure, she sure came out as a big winner. She presented herself as a strong leader who could get things done. The biggest losers in this endeavor are the Republican leaders in the Congress, who performed very poorly and, therefore, should be replaced. While they may have been right in opposing the massive cost of the bill, the American people did not particularly appreciate their tactics of non-cooperation and partisanship.

The voters like the winners, even if they don't agree with the legislation in its entirety. Republicans' calculation that by voting "no" on health care, they would gain a political advantage in the mid-term elections in November would prove to be dumb-founded. I believe Obama's stature as a strong leader has been vastly improved; he will be perceived as a problem solver while Republicans will be viewed as merely playing politics for their own self-interest with almost no desire to solve people's problems. The November elections are not likely to yield any tangible benefits for the Republicans.

On the merit of the health care bill, I am not entirely happy with the cost of the reform. However, I am glad that this first step was taken. We can always fine-tune the reforms in the future by adding, subtracting, or modifying, as needed, to make them more effective. We just needed to start somewhere. I think we need to do more to bring down the health care cost:
· We need to regulate the rates and profits of health care providers through some kind of public commission, just as we regulate the telephone, gas, electric, and water companies today.
· We need to do more on malpractice suits and out-of-control awards with the objective to have the service providers pass on the reductions in malpractice insurance premiums and awards to the patients in the form of lower rates.
· We should allow re-importation of drugs from abroad and facilitate the introduction of generic drugs sooner.

Obama proved that he can think big and still deliver. This bodes well for his other initiatives such improving infrastructure, building high-speed railways, exploring alternative energy technologies, remaking our educational system, finalizing financial reforms, implementing campaign reforms, etc. The victory on health care can pave the way for Obama to have a remarkably successful presidency and thus become a shoe-in for a second term.

Stock market is ready to explode - DJIA headed to 12,000

2010-03-17T11:21:00.012-04:00

Posted by Shyam Moondra

Yesterday, the Federal Reserve Board announced that they expect to hold interest rates low for an extended period of time to let the economic recovery take firm hold. Today, the Labor Department announced that Producer Price Index declined by 0.6% in February. Low interest rates and low inflation are like music to the ears of the stock market and yet the market has moved up only slightly with a very low volume. It's possible that investors are holding back because of the recent mixed consumer confidence and housing data that prompted some to entertain the thought of second dip in the economy. However, those unfavorable economic indicators may have been distorted because of one of the most severe snowstorms in the North East region in the last fifty years.

It's hard to ignore the following encouraging signs that suggest that economic recovery would accelerate in the coming weeks and months:

· The corporations with low inventories are lean and mean; any up-tick in the demand for goods and services would significantly increase their profits and employment levels.
. Manufacturing has a lot of unused capacity which means that economy can recover without rekindling inflation.
· The corporate world has very strong balance sheets, hoarding over $1.4 trillion cash that could fuel the capital investments over the next couple of years.
· Consumers are being cautious because of lingering high unemployment level; however, they have also shown their willingness to make big purchases as is evident by a strong pick-up in the automobile sales. They will start spending more freely, once they are convinced that economic recovery is taking hold.

The present cautious stock market is in fact a prelude to a stronger and sustained up move with heavy volume in the coming days and weeks. Based on the forecasted 50% increase in corporate profits this year, the Dow Jones Industrial Average could head to 12,000 by the end of third quarter and even hit 13,000 by early next year.

As the paper profits pile up, investors would be tempted to take profits and thus DJIA's move to 13,000 would not be without wild swings. At any sign that the market has temporarily peaked, there will be a floodgate of profit taking which will push the market down but then bargain hunters will move in and the market will move up again on a short order. The key to maximizing the returns would then be to have a good sense of timing in terms when to take profits and when to move back in.

This year and the next are the golden opportunities for investors to make good money, but only if they could master the art of market timing.

Chief Justice John Roberts is not above the People

2010-03-11T08:55:00.007-05:00

Posted by Shyam Moondra

John Roberts, the Chief Justice of the U.S. Supreme Court, made a critical comment about President Barack Obama's recent State of the Union address given at the joint session of Congress. I thought that was out of line and offensive. Roberts seemed to suggest that the Supreme Court is somehow immune from criticism by the elected officials or the American people. Justices also occasionally make mistakes like all other humans, so there is nothing wrong if President or anyone else for that matter criticizes them for their wrongheaded decisions or poor performance.

Roberts said that Obama's criticism of the court's decision to allow unlimited corporate campaign contributions during elections was an attempt to politicize the independent court. Hello! When Justices Scalia, Thomas, Roberts, and Alito always vote as a block, representing the views of conservatives, isn't the Supreme Court already politicized by the very same people who now complain about politicizing the Court? Justices are supposed to decide cases without bias or personal prejudices. How is it then that the court watchers often can predict beforehand how these conservatives (or liberal justices for that matter) would vote on any given controversial issue? When conservative justices banded together to elect Republican George W. Bush as the President vs. Democrat Albert Gore, wasn't that a political decision?

Today, we have a gridlock on the Supreme Court between the conservative and liberal justices. Most cases are decided by a single justice, Justice Kennedy. So why don't we just fire everybody else and let Kennedy decide all the cases that come in front of the Supreme Court. Today's Supreme Court is a sham.

Roberts' criticism of Obama reflects abuse of power bestowed upon the justices by virtue of the fact that they are appointed for life by the President and confirmed by Congress. With lifetime appointments also come a certain sense of arrogance and misconceived belief that the justices are above everybody else, when in fact they are not. In a democratic country, it's the People that are the supreme and not the justices who sit on the Supreme Court.

In recent years, my respect for the Supreme Court has declined largely because of how it functions. The Court increasingly shows lack of objectivity in deciding divisive issues such as abortion, campaign contributions, school prayer, etc. Their decisions are often wrapped in medieval age thought processes that are no longer valid. As time changes, so do customs, views, and temperament. As such, legal decisions should be based on contemporary interpretation of the constitution and not as if it is a standstill constant.

I like to propose a few reforms of this declining institution:
· Lifetime appointments should be abolished. The idea behind lifetime appointments was that they wouldn't have to worry about the politics of re-appointments. However, the fact is that the court is already politicized by the justices themselves, so by appointing them for four-year terms at a time wouldn't take away their independence. On the contrary, it would take away their arrogance and make them more accountable.

· There must be a way to remove justices, who consistently interpret constitution based on their own personal philosophy and make unfair and biased decisions (and that's why we need a term limit for justices).

· The Congress should explore if we could do away with the Supreme Court and replace it with a new more fluid mechanism in which judges are tapped from the federal bench on a case-by-case basis depending on the nature of the case and the expertise required. That way we have constantly changing faces on the high court bench and not have this Scalia-Thomas-Roberts-Alito axis of bias who frequently vote as a block based on their ideology rather than the merit of the case.

For now, Roberts should apologize to President Obama and the American people for his outburst. He may be above the law but he is not above the People.

Today's stock market decline may be an overreaction - it's time to buy

2010-02-04T11:52:00.006-05:00

Posted by Shyam Moondra

Today's stock market decline may be an overreaction to the disappointing report on new jobless claims. However, the broader indicators continue to be positive, and, therefore, today's market sell-off may turn out to be a buying opportunity.

Recent market reports have generally been good:
· The corporate earnings in the fourth quarter of 2009 exceeded consensus estimates of the analysts. The average PE ratio for S&P 500 stocks now stands at 19, with the projection for 2010 at around 15. This, by no means, makes the stocks as too expensive.
· Sharp productivity gain of 6.2% in the fourth quarter of 2009, the largest gain since 2003, means the corporations have brought down their cost-structure considerably by staying lean-and-mean through the 2008-9 recession. That means, even a slight pick up in demand could significantly boost the corporate profit margins.
· In recent months, industrial production, orders for durable goods, and service industry index have all increased.
· The housing market has stabilized, with increasing home sales and a slight up-tick in the home prices.
· The consumer sentiment and personal savings continue to be positive.
· The market decline may bring an unintended benefit of taming the inflationary expectations that will make it easier for the Federal Reserve Board to phase-in higher interest rates in the second-half of this year.
· The technology sector took a hit in recent weeks, which is actually good for the market. This sector was running ahead of the overall market, making it difficult to sustain the market's upward momentum. However, with the healthy correction in the technology sector, the market is now poised for a sharp up move, led by these same stocks that caused the recent decline in the market.

While the job market has proven to be stubbornly sluggish, as is evident from today's report on new jobless claims, this is nevertheless a lagging indicator. The Senate is considering the new job creation bill that will give a boost to the job market soon. The consumers are not necessarily going to wait for actual job growth before they start aggressively spending again; all they are looking for is an indication that the job market has stabilized and it may soon start growing again.

In this environment, consumer-oriented stocks (such as banks, casinos, hotels, airlines and consumer staples) and technology stocks look attractive.
(Disclosure: The blogger owns stocks in most of these sectors)

Obama's first year in office - he traveled so far and yet all he did was come back to where he started

2010-01-20T14:22:00.015-05:00

Posted by Shyam Moondra

President Barack Obama just finished one full year in office. He seems to have traveled so far and yet it feels like all he did was come back to where he started. I give him a C for his efforts and personal qualities, which is far less than a B+ he gave himself during an interview on CBS. If anything, he certainly gained valuable experience from which he could learn and grow, and hopefully accomplish big things in the next twelve months.

Obama's election as president of the United States was transformative and it raised hopes for change among the American people. Right after his election, Obama enjoyed tremendous popularity and many expected that he would capitalize on that popularity and accomplish big things on a short order. The people were almost euphoric about the possibilities. They thought Obama will bring more bi-partisanship in national political discourse, stop job losses and home foreclosures, sign a health care reform legislation, implement new regulations for the financial sector, reach agreements with North Korea and Iran on non-proliferation of nuclear weapons, achieve an international consensus on climate change, and reach agreements with Russia on new arms treaty. He succeeded on none, making the voters angry and disillusioned that led to the unexpected victory of Scott Brown, a Republican, in the most liberal state of Massachusetts, filling the seat of the late Sen. Ted Kennedy. Now that the Democrats have lost their super majority in the Senate, it would become even more harder to get things done.

What went wrong?
· Obama failed to provide leadership. Obama proposed things but then he uncharacteristically became aloof from the process, leaving the members of Congress with diverse opinions to sort things out. Ultimately, the process became so polarizing, thanks to intense lobbying by the various interest groups, that it became almost impossible to realize Obama's original vision.

· Obama, a man with excellent communications skills, couldn't persuade a single Republican to vote with him. His failure to work effectively with the opposition was one of the biggest disappointments, especially to the independents.

· Lackluster leaders in the Congress from both parties sealed the fate of many initiatives that Obama proposed. The Senate Majority Leader is utterly ineffective, the House Speaker is one of the most disliked politicians in the history, and Republican leaders in the Senate and House have zero leadership skills. The Democrats have a majority in both houses and yet the party is doomed because of lack of discipline among the rank-and-file and Obama has not paid sufficient attention to the inner workings of the party.

· Obama's tendency to throw money at problems has turned off many independents and conservative Democrats. He needs to offer more imaginative solutions that require less new spending.

· Obama also suffered from bad luck. If his $700 bi stimulus spending had created the promised two million jobs, the mood of the people would have been very different than it is today. This recession has proven to be very stubborn and more stimulus may be needed down the road.

So where does Obama go from here?
· Obama needs to make some staff changes. Secretary of State Hillary Clinton and Secretary of Defense William Gates should be kept, but everyone else should be re-evaluated. Chief of Staff and Secretary of Department of Homeland Security should be replaced.

· Obama needs to move to the center and abandon his socialist tendencies, or else he will permanently lose the support of the independents. When all Republicans in the Congress vote against him, that is a big political problem. Obama needs to change his governing style and peel away pragmatic Republican lawmakers to achieve his agenda. He needs to forge and maintain special relationships with the centrist Democrats, non-ideologue Republicans, and independents to get big things done.

· Bring about changes in the Democratic leadership in the House and Senate. We need new leaders in the mode of the late Speaker Tip O'Neil or the late Senate Majority Leader L. B. Johnson who can bring discipline among the rank-and-file Democrats and also work effectively with the opposition.

· Provide more leadership. Obama tends to give broad outlines of his proposal but then he just walks away and let the members of Congress fight it out with disastrous results. Obama needs to roll up his sleeves and hammer out detailed compromises with the Democratic and Republican leaders in the Congress. Obama's recent meeting with the Republicans in Baltimore was a good start. He needs to follow-up with regular meetings with the Congressional leaders from both parties at the White House, as he said he would.

· Stop throwing money at problems at a time when our national debt and budget deficit are running so high. The case in point, health care reforms. Obama said all the right things during the election campaign, but once in office, the Democrats turned the main objective of cutting health care costs into developing new subsidies and entitlement programs. After the experience of escalating costs of Medicare and Social Security, the American people have almost no appetite for starting any new entitlement programs. Obama needs to go back and prune the health care bill to focus on insurance reforms and cost cutting. If costs are brought down, many of the uninsureds would be able to afford to buy health insurance, and thus the number of uninsureds would go down over time. The Democrats need to cut-down on the proposed subsidies and new entitlement programs.

· The first stimulus has not worked as expected, in terms of job creation. It seems inevitable that a second stimulus would be required, or else we could see the recurrence of recession in the second-half of 2010. This time, Obama needs to focus more on tax incentives rather than new spending. The government spending is never efficient and it involves a lot of waste. On the other hand, tax incentives put more money in the hands of non-government bureaucrats that tends to have immediate positive effect on economy. Besides, taxes can be raised again in the future when we have our prosperity back, but the government spending is never recovered.

· While we are still providing stimulus to the economy, simultaneously, Obama needs to aggressively propose a credible plan to reduce budget deficit and national debt. Unless the budget deficit is brought down to a more reasonable level, we are headed to a tough interest rate environment which will choke-off economic growth. Obama should eliminate wasteful spending in all different parts of the government, including the Defense Department. The federal budget gap, however, cannot be eliminated just by reducing wasteful spending; at some point, we will have to increase income taxes for those earning more than $250,00 a year ($500,000 for a couple) and close-down the corporate tax loop-holes (it's unfair when companies like Goldman Sachs pays only 10% in taxes because of creative off-shore trading schemes).

President Obama has many fine personal qualities, he is a very likable and honest man, he is very intelligent and well versed with public policy issues, and, most importantly, he has extraordinary communications skills. There is no reason why he can't use all of that and lead friends and foes into forging partnerships that would deliver for the American people. Obama just needs to show more leadership and get more involved in crafting legislation, collaborating with both Democrats and Republicans in the Congress. Even though, he didn't do as well as expected (true, he suffered from very high expectations), but he has the necessary skill set to achieve big things in the remaining three years of his presidency. Yes, he can!

Inspiring Quotes

2009-12-26T12:04:00.008-05:00

Posted by Shyam Moondra

"I have become my own version of an optimist. If I can't make it through one door, I'll go through another door - or I'll make a door. Something terrific will come no matter how dark the present." - Rabindranath Tagore

"Strive not to be a success, but rather to be of value." - Albert Einstein

"Science is organized knowledge. Wisdom is organized life." - Immanuel Kant

"Forget injuries, never forget kindnesses." - Confucius

"When we are offended at any man's fault, turn to yourself and study your own failings. Then you will forget your anger." - Epictetus

"Life becomes harder for us when we live for others, but it also becomes richer and happier." - Albert Schweitzer

"It is difficult to find happiness within oneself but it is impossible to find it anywhere else." - Arthur Schopenhauer

"It does not matter how slowly you go so long as you do not stop." - Confucius

"All the great things are simple, and many can be expressed in a single word: freedom, justice, honor, duty, mercy, hope." - Winston Churchill

"When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years." - Mark Twain

"Those who make peaceful revolution impossible will make violent revolution inevitable." - John F. Kennedy

"Everything comes to us that belongs to us if we create the capacity to receive it." - Rabindranath Tagore

"Imagination is just as important as knowledge." - Albert Einstein

"Nothing is particularly hard if you divide it into small jobs." - Henry Ford

"Be sure you put your feet in the right place, and then stand firm." - Abraham Lincoln

"The more difficult the victory, the greater the happiness in winning." - Pele

"I know that I'm never as good or bad as any single performance." - Charles Barkley

"The mind is everything; what you think, you become." - Gautama Buddha

Congress is the weakest link in the government - we badly need reforms‏

2009-11-23T07:46:00.006-05:00

Posted by Shyam Moondra

The Congress hit the lowest approval rating on record of 14% not long ago. The people view the Senate and House as the weakest links in the government. The Congress has become a burden on the tax payers with very little positive to show for.

The Congress was created to reflect the views of the American people, to make it a government of the people, by the people, and for the people. Today, the Congress is a mess; it has largely become a non-productive institution that exists only because it's in the constitution and not because people really want it. If the Congress were run as a corporation, it would have been dismantled already.

A majority of senators and congressmen are corrupt; they are there not because they truly want to serve their country but they are there to make a comfortable living. Very few members are hard-working people in the mode of the late Sen. Ted Kennedy; most of them are either deadwood or they are just getting a free ride. They spend most of their time scheming how to raise campaign money through lobbyists to get reelected. Most of the work is done by a handful of hardworking members, who do care about the country and the people.

In the last eight years, the influence of the businesses in the Congress has increased tremendously via their intense lobbying efforts and campaign contributions, but mostly at the expense of the ordinary Americans.

We need drastic changes in the role of the Congress and how it operates. We badly need constitutional amendments to reform the Congress and make it more productive and responsive to the people's needs and not their own re-election needs. There are a number of things that could be done such as:
. Imposing term limits. Public service should not be used as a way to make a living.
. Banning corporate and industry lobbying.
. Banning corporate and industry campaign contributions.
. Requiring the members to spend more time in Washington, DC working the public policy issues rather than taking frequent recesses and time off in the name of campaigning.
. Holding the members accountable for non-performance immediately and not by voting them out only after their term has expired.

Now the million dollar question is if the reformers would agree to be reformed.

Recent price increases by drug manufacturers show the need for a government option

2009-11-22T22:39:00.008-05:00

Posted by Shyam Moondra

The drug manufacturers recently increased the drug prices in anticipation of the new health care legislation, thereby taking back some of the cost reductions they had promised only two months ago. This demonstrates why any health care reform must include a government option that would keep the service providers' greed in check. In the absence of a government option, it's very likely that the health care reforms would in fact increase the cost rather than reduce it as is hoped for by the legislation supporters.

If a government option is not included in the final health care bill, as an alternative, the bill must include a new regulatory frame-work for the entire health care industry (drug manufacturers, hospitals, insurance companies, and doctors) in which their rates and profits would be regulated by the government commissions just like public utility commissions today regulate telephone, gas, electricity, and water companies.

If the health care bill requires every American to buy health insurance, then it is imperative that prices are reasonable and that means either we have a non-profit government plan or the government regulates the prices and profits of the service providers. It would be unconstitutional to force Americans to buy health care insurance at artificially inflated prices.

In the interim, the drug manufacturers should be punished for their bad behavior. The Congress should immediately consider:
1. Changing the patent laws permitting the marketing of generics sooner.
2. Allowing reimportation of drugs from Canada and Mexico.
3. Suspending the tax subsidies given to the pharmaceutical industry.

Dow Jones Industrial Average headed to 11,000

2009-10-31T10:30:00.012-04:00

Posted by Shyam Moondra

In the past few days, the stock market has been very volatile, up 200 points one day and then down 200 points the next day. Some of this volatility may have been caused by the year-end window-dressing by mutual and hedge funds whose fiscal year ends in October. The market had gone up quite a bit since it bottomed out last March, so it was inevitable that some investors would want to take profits and short sellers would move in aggressively to create a downward momentum.

There are people who think that the market correction of the last few days may in fact be an exceptional buying opportunity for the long-term. Some of the stocks, that did exceedingly well since March, have been hammered down in recent days by as much as 25%. The bulls point out the following positive trends that suggest that the market is headed much higher:
· The recent quarterly earning reports exceeded analyst expectation by a wide margin. Most companies increased their guidance for the future.
· The latest GDP report showed that the economy grew at a faster rate than anticipated.
· The corporations have strong balance sheets, hoarding a lot of cash to support future capital investments.
· The corporations did a marvelous job in managing their cost structure during the recession and they have never been more lean and mean. That means their profit margins will expand rapidly as the economy recovers.
· The inventories are at historically low levels, suggesting that the industrial production may move into a higher gear (even if demand does not increase significantly), which means more jobs down the road. Recent industrial production report, showing better than expected increase, supports that belief.
· The stimulus spending was back loaded; as much as $585 billions worth of stimulus still remains to be spent through 2010.
· The Federal Reserve Board has indicated that money supply will remain bountiful and interest rates will remain low for the foreseeable future. Historically, liquidity and low interest rates have always favored the stock market in general and the financial sector in particular.
· Weak dollar has enhanced competitiveness of multi-national corporations that will garner a bigger market share as the global economy recovers. Weak dollar is also helping to reduce the trade deficit.
· Recent labor force reductions have considerably improved productivity that will expand the profit margins of the corporations in the near future.
· Since the capacity utilization remains low and demand is still weak, inflation is not going to be a problem in the foreseeable future. This gives the Fed some flexibility to keep interest rates low at least until the second-half of 2010.
· Recent housing reports suggest that the housing market has bottomed out, as indicated by the recent increases in home sales and home prices.
· The consumers have done a much better job in controlling their spending and saving more during this recession than any other recession in the past. This bodes well for the economy because as soon as the economy picks up some speed, the consumers will be ready to start spending freely again.
· The stocks are by no means over-valued with the average forward PE ratio in the low 10's. Recent merger and acquisition activity and share buyback announcements (e.g., by IBM) affirm that equity valuations are very attractive.

The bears have their own reasons for being pessimistic for the near-term. They cite the following trends that make them cautious:
· The stock market has gone up over 50% since March, making it the largest up move in a short period ever. It should be kept in mind though that the market went down too much in March because of the fear that some of the biggest financial institutions could go bankrupt, causing a systemic breakdown of the entire financial sector. However, that never happened and we are past that possibility now. One could argue that the market should not have gone down so much in the first place, and, therefore, it's misleading to keep harping on the 50% appreciation. Had market not gone down as much as it did because of sheer panic, the resulting appreciation would have been quite modest and considered normal in the aftermath of a severe recession.
· The unemployment rate will remain high at least through 2011, making it a jobless recovery. High unemployment rate will keep consumer spending in check. Since consumer spending fuels two-third of the economy, we may not see a quick recovery from recession any time soon. The counter argument would be that, while it's true that the lagging employment indicator would be slow to recover, the consumers are not going to wait for full recovery before they start spending again. All they are waiting for are the signs of a recovery-trend which will become obvious within the next six months, a lot earlier than 2011.
· Recent government spending (e.g., stimulus package and bailouts) has significantly added to the federal debt and budget deficit is widening. This will eventually lead to higher interest rates, choking off the economic recovery. We should, however, note that as the recovery takes hold, treasury revenues will increase and the budget deficit will eventually abate. Nevertheless, President Obama and the Congress would have to come up with a credible plan to address the issue of debt and budget deficit through a combination of spending cuts and tax increases for the wealthy individuals and corporations (shutting down off-shore tax havens and closing tax loop-holes).
· Weak dollar will lead to higher inflation because imports will become expensive which, in turn, will induce the domestic producers to increase their prices.
· The credit card losses and commercial real estate losses will keep the financial sector under pressure for the foreseeable future.

The stock market always looks ahead and most economic indicators (GDP growth, corporate earnings, housing sales and prices, industrial production, etc.) point to economic recovery from the worst recession of our times. While the recovery may be erratic, its direction is not in dispute. Early this year, industrial production was declining which led to layoffs, which, in turn, led to lower consumer spending, and that led to lower corporate profits, thereby creating a downward spiral in which each economic calamity was feeding into the others. But now we are in the process of an upward spiral that will restore employment, corporate profits, and stock prices over time. While there are very few plausible hazards that could choke off the recovery, there are many more potential catalysts on the horizon that could in fact propel the stock markets to new yearly highs in the coming months. The Dow Jones Industrial Average at 11,000 before the end of 2009 is not a far fetched possibility. One thing unique about Americans is that they are driven by a sense of optimism and hope. They thrive in adverse conditions and turn calamity into opportunity.

Proposed health care bills will not reduce costs

2009-10-14T14:35:00.005-04:00

Posted by Shyam Moondra

The health care bills passed by various committees in the Senate and House will cover many, if not all, of the 40 millions or so people who are presently uninsured, thanks to the subsidies provided by taxpayers' money at a cost of little less than $1 trillion over ten years. However, these bills will most likely increase the costs for those who presently do have the insurance coverage and/or the quality of health care will go down. All in all, none of the bills being currently considered by the Congress is satisfactory and the American people have a reason to worry about the future.

The following are the major weaknesses of the health care bills being considered and what needs to be done to improve them:

· The main problem is greed and profiteering among the service providers. We need to regulate insurance companies, hospitals, and drug companies as utilities. Health care is just as essential as electricity, gas, water, and telephone service. The state public health care commissions (structured in the same way as state public utility commissions are structured) should decide on the rates and profit margins of the health care providers. This approach will ensure that the health care costs remain under control.

· The final plan must have a non-profit government option to keep the competitive pressure on greedy health care providers. This option will provide an added protection if the other methods of cost reductions don't produce the desired results. Without this option, it does not seem fair to require people to buy mandatory insurance at inflated rates from the profit-hungry providers. This mandatory imposition on the public without a means to buy the insurance at a reasonable rate may even be unconstitutional.

· The inflated health care costs are partly due to exorbitant malpractice claims and huge malpractice insurance premiums hospitals and doctors have to pay that induce them to over-prescribe tests and treatments just to protect themselves. Without an effective tort reform, it's very unlikely that any of the proposed health care plans will result in lower health care costs.

· The current patent laws make it difficult for competing drug manufacturers to bring out inexpensive generics to the market place. The final health care plan should change the patent laws shortening the duration of exclusivity to enable generic offerings sooner. Also, the plan should allow re-importation of drugs from Canada and Mexico.

The best Afghanistan strategy: Give what Gen. McChrystal wants and then negotiate with the Taliban from strength

2009-10-07T09:37:00.031-04:00

Posted by Shyam Moondra

The U.S. focus on Afghanistan began in 1993 after Al Qaeda operatives exploded a bomb in the underground garage of the World Trade Center in New York that killed six people and injured 1,042. The WTC attack was followed by the 1996 Khobar Towers bombing in Saudi Arabia and 1998 attack on the U.S. Embassy in Nairobi, Kenya that resulted in the murder of hundreds of people. In 1998, President Bill Clinton ordered cruise missile attacks on Al Qaeda training camps in Afghanistan. The Clinton administration demanded that Taliban, the rulers of Afghanistan at the time, expel Al Qaeda from Afghanistan but the Taliban refused. On September 11, 2001, Al Qaeda terrorists hijacked three commercial jetliners in the U.S. and crashed them into the twin towers of the WTC, the Pentagon, and the countryside of Pennsylvania, killing about 3,000 people. That attack led President George W. Bush to issue an order to invade Afghanistan, remove the Taliban from power, and install Hamid Karzai as the President of Afghanistan. Osama bin Laden, the head of Al Qaeda, escaped and is now believed to be hiding in the tribal area of Pakistan bordering with Afghanistan. Right after the removal of the Taliban from power, the U.S. efforts in Afghanistan were scaled down to support the war in Iraq. The vacuum created by the withdrawal of the American forces couldn't be filled by the corrupt and inept government under Karzai that led to the comeback of the Taliban. The Taliban now controls 80% of the country and they are on the offensive while the casualties of the NATO forces are mounting.

Gen. Stanley McChrystal, the commander of nearly 60,000 U.S. troops in Afghanistan, believes that he would need at least 40,000 more troops to stop the Taliban from taking over the country. His proposed strategy combines the military actions with the rebuilding efforts to win over the support of the general population. These requests are coming at a time when the U.S. government can least afford to increase the war spending because of the balooning budget deficit.

First, let us look at the players in the Afghanistan conflict:
· The Taliban (from the Arabic word for student, “taleb") are fundamentalist Sunni Muslims, mostly from Afghanistan’s Pashtun tribes. The Taliban dominates large swaths of Afghanistan and a large part of Pakistan’s Federally Administered Tribal Areas. They scorn democracy and consider any secular or pluralistic political process as an offense against Islam. The Taliban’s version of Islamic law, or Sharia, is deviant from prevailing interpretations of Islamic law and practice. They have been fighting foreigners for centuries – modern armies of Britain and Russia couldn't win there. They are tenacious, they know the terrain, and they can fight with limited resources. The history tells us that Afghanistan can't be governed without their support.

· Al Qaeda is a militant Islamic terrorist movement that is run by Osama bin Laden. It started out as an organized populist effort to dethrone the Saudi royal family. The Taliban, a quasi-political movement within Afghanistan, gave Al Qaeda shelter in Afghanistan, where Al Qaeda trained for and planned terrorist acts around the world, mostly against the western countries and Saudi Arabia. The two movements had similar outlooks except that the Taliban's terror activities were inflicted mostly on its own citizens.

· President Hamid Karzai, by most reports, is a corrupt and inept politician, who may be involved in drug trafficking and who is believed to have stolen money from the international aid funds. Karzai is accused of winning the recent presidential election fraudulently and he is not very popular among the people of Afghanistan, especially outside Kabul. Unfortunately, the U.S. is in a bind because constitutionally Karzai is the only person the U.S. can deal with. If the U.S. exit strategy is to stabilize Afghanistan before leaving, Karzai is hardly a part of the solution.

The U.S. conflict with the Taliban did not begin because of any ideological differences, although the U.S. strongly opposes Taliban's treatment of women and their application of extreme medieval Sahira laws. The main U.S. complaint against the Taliban is that they provided a safe haven to Al Qaeda that continues to plan terrorist attacks against the U.S. and its allies even today.

The current situation on the ground favors the Taliban. Given that they are gaining strength, the U.S. cannot just walk away, as some Democrats are suggesting. A total withdrawal of the U.S. forces would amount to conceding defeat, which will have negative policy consequences elsewhere in the world, especially with respect to the Middle East, North Korea, and Iran. The U.S. will lose credibility and moral standing if they just pack and leave; the people of Afghanistan will suffer immensely. Besides, Osama bin Laden has not been captured yet, so if NATO pulls out, Al Qaeda will move back into Afghanistan. Therefore, withdrawing from Afghanistan is strategically a bad idea. At the same time, given the history of Afghanistan and Taliban, it's a wishful thinking that NATO could eventually win militarily. A negotiated settlement with the Taliban may be the only viable end-game. However, any negotiation with the Taliban at this juncture, when the U.S. position is relatively weak, is not advisable.

Given the way things stand today, it makes sense to go along with the McChrystal approach and send more troops to Afghanistan. After a year or so, assuming NATO is able to get the upper hand, we could then initiate negotiations with the Taliban and make a deal that incorporates the following terms:
· Change their certain attitudes – such as role of women in the society, education of women, respect for individual liberties, democracy, etc.
· Eliminate opium farms and stop drug trafficking.
· Help find Osama bin Laden and eliminate Al Qaeda.
. Do not support the Pakistani Taliban and destabiliize Pakistan. Cooperate with Pakistan to root out Al Qaeda.
· In return, the western countries and other oil-rich countries would offer financial aid – not in the form of cash but in the form of contracts to American and European companies to build roads/bridges, hospitals, schools, water treatment facilities, power stations and electricity grid, and democratic institutions (don't give cash because most of it will end up in the pockets of the Taliban rulers). The objective must be to make a difference in the lives of the people of Afghanistan.

Excessive executive compensation vs risk taking

2009-09-19T16:19:00.006-04:00

Posted by Shyam Moondra

Last week, the Federal Reserve Board disclosed that it is reviewing the compensation practices of the financial sector for the CEOs, traders, and loan officers. It's a well known fact that top-notch traders and loan officers can walk away with tens of millions of dollars in performance-based compensation that invariably leads to excessive risk taking. The housing bubble of 2007 was partly created by mortgage loan officers, who routinely approved mortgage applications of credit-unworthy home buyers; the more mortgages they sold, the more money they made. The investment bank Lehman Brothers collapsed because their traders took excessive risks in trading mortgage-based securities that led to crushing losses. Many of the investment banks and hedge funds were leveraging themselves by as much as 40:1, creating the potential for severe consequences if their bets didn't go their way. The failure of Lehman Brothers and the possible failure of another financial giant AIG forced the federal government to risk taxpayer's money by aggressively infusing liquidity into the largest financial institutions to avoid a catastrophic systemic failure of the entire financial system.

The aggressive actions taken by the Congress and regulators helped avoid a massive failure of the credit markets, although they couldn't save the economy from slipping into the most severe recession since the depression of the 1930's. Now that credit markets are steadily coming to normalcy and economy is gradually recovering, the question everybody is asking is could this happen again. President Obama has made it clear that if financial institutions take extreme risks and get in big trouble again, the government will not bail them out, even if they are too big to fail.

The former Fed Chairman, Alan Greenspan, said that unless a way can be found to change human nature (about greed), another financial crisis is inevitable. The root of the problem is the present compensation system, which rewards excessive risk taking exorbitantly. Some of the top-performing traders are known to have earned hundreds of millions of dollars a year. Recently, the Citigroup CEO Vikram Pandit disclosed that Citi's top trader would earn $100 millions this year and he admitted that that kind of compensation is excessive. In fact, the largest five financial institutions have put aside $50 billions for bonuses this year.

One of the easiest ways to bring discipline and sanity in compensation practices of the financial sector would be to impose caps on the compensation of the CEOs, traders, and loan officers. However, Republicans and conservative Democrats vehemently oppose such caps because that would amount to direct government interference in the free-market capitalist system.

Here are a few things that Congress and regulators could do:
· All financial institutions with assets of more than $1 billion must not be allowed to have a leverage of more than 4:1. The capital ratios of the financial institutions must be closely monitored and enforced by the regulators.
· In the second quarter of 2009, Goldman Sachs reported unexpectedly large profits; however, a big chunk of those profits came from trading in stocks, bonds, and commodities and not from traditional investment banking functions (such as mergers and acquisitions, IPOs, etc). These trading profits don't directly contribute anything positive to the economy. Big players manipulate markets, cause market volatility, and make money at the expense of less sophisticated small investors. It's time the Congress put restrictions on computerized day trading by large financial institutions. Specific restrictions could include: limiting short sales in a company's stock to 1% of its outstanding shares, banning naked short selling, reinstituting the "up-tick" rule for short selling, limiting how much trading they can do in derivatives (e.g., stock options), requiring the financial institutions to hold the stocks they buy for a certain minimum period (e.g., 20 business days), and imposing a hefty 80% tax on capital gains realized by financial institutions from short-term trading. In fact, former Fed Chairman, Paul Volcker, has suggested that banks be barred from trading with their own money (they can trade in their client's account but not in their own account).
· Regulate hedge funds in the same way as mutual funds are regulated. Many of these hedge funds are funded by large banks, so if hedge funds fail because of excessive risk taking, they might bring down their sponsoring banks.
· Impose corporate governance rules that would require compensation plans for executives, traders, and loan officers to be approved by the shareholders.
· Impose a tax surcharge on companies that pay their CEOs and other highly paid employees more than a pre-specified limit. Also, the excessive compensation could be made non-deductible for tax purposes.

Democrats: Either exercise power and govern or get lost

2009-09-17T08:22:00.014-04:00

Posted by Shyam Moondra

The White House, Senate, and House of Representatives are all controlled by the Democrats and yet they are unable to move forward on a number of defining issues such as health care and regulatory reforms. The Democratic Party lacks discipline and unity. They have wasted so much of their time bickering on health care that other important issues including regulatory reforms, executive compensation, Afghanistan, energy independence, climate change, and education still remain to be tackled.

Most of the blame for non-performance of Democrats, of course, lies with their leaders:
· President Obama has not done much to unify his party. He lacks strong leadership skills. He is way too conciliatory (President Lincoln once said, "Be sure you put your feet in the right place, and then stand firm"). Being the president means you listen well, but it also means you lead based on your convictions and twist some arms if you have to. So far, on health care, Obama has been more of a follower of a chaotic process characterized by Democrats going in thousand different directions and there is no one with a strong personality to bring them together. Obama shouldn't hesitate to withhold money for states (or threaten to close military bases in those states) whose senators and congressmen have been creating obstacles in the passage of his agenda in the Congress.
· The Senate Majority Leader, Harry Reid, is a total disaster. He is very weak and he has almost no control of his senate caucus. Reid should immediately step aside. The Senate Democrats need to elect a new leader, someone with the hardedge political skills of the late President Lyndon B. Johnson, who became the Senate Majority Leader in 1955 when Democrats had a majority by just one vote.
· The Speaker of the House, Nancy Pelosi, is one of the most polarizing political figures in the country. She is extremely disliked not only by the House members but also by the population at large, as is evident by her very low approval rating. On most issues, Pelosi tends to be far left of the center where most of Americans are. It's no coincidence that many Democrats and almost all of Republicans in the House mostly vote against her. If Democrats elect a new Speaker, it will help them immensely to unify the Democrats and also win over at least some of the Republicans in the House.
· DNC Chairman, Tim Kaine, is the most invisible Chairman in the history of the Democratic Party. No one really knows where he is and what he is doing. Kaine needs to be more proactive in playing a leading role in bringing in the strayed senators and congressmen to the fold by using campaign money and other prerogatives as bargaining chips.

With the Democratic control of the White House and both houses of the Congress, they should be able to move on most issues simultaneously with a lightening speed, especially when Republicans are bogged down with their ideological tendencies (that most Americans don't agree with) and they have nothing new to offer. Unfortunately, every Democrat is playing his or her own tune - that's not the way to get things done. The so-called "Blue Dog Democrats" may get self-gratification by showing off their power but they should remember that they can't govern if they are not united. And if they can't govern then the American people are less likely to put them in power the next time around. The Democrats have a golden opportunity to get big things done but only if they could unify and work together for the good of their party and country.

President Obama's speech on health care was effective – the ball is now in the Congress' court

2009-09-10T08:17:00.010-04:00

Posted by Shyam Moondra

President Obama did a good job in outlining his health care plan in an address to the joint session of the Congress last night. The speech was well crafted and effectively delivered. Now the ball is in the court of the Congress that must deliver the legislation by the end of the year.

Prior to this address to the Congress, Obama was steadily losing ground in terms of public opinion because of his aloofness from the legislative process that many viewed as exhibiting lack of leadership. Also, his inadequate engagement with the Congress led to a lot of misinformation propagated by those, primarily conservative Republicans, who wanted to kill the initiative altogether.

This is what I liked in Obama's speech:
1. He articulated clearly that something had to be done on health care this year or else the whole economy will suffer in the long-term.
2. For the first time, he talked about tort reform that is essential to stop over-prescription of tests and treatments. The doctors and hospitals tend to order excessive tests and treatments just to protect themselves from potential malpractice lawsuits. These excessive tests and treatments significantly add to the cost of health care. The trial lawyers, who contribute heavily to the Democratic Party, generally oppose any changes in the malpractice laws; therefore, it was significant that Obama brought it up in his speech.
3. His three examples of how the late Sen. Ted Kennedy partnered with the prominent Republican senators to pass health care laws for children were particularly effective. Those examples will sway the attitude of many moderate Republicans who will now work harder to pass the health care legislation this year.
4. He successfully laid to rest misunderstandings about "death panels," government plan coverage for abortions, and the government plan driving insurance companies out of business - conservative Republicans had been using these misunderstandings to drive the public opinion against the health care reforms.
5. The government option will be started in a limited way, accounting for less than 5% of the total population.
6. The reasons for making health care coverage mandatory (just as most states require all drivers to buy no-fault car insurance) were explained better than before.
7. The proposed plan will be paid for without adding to the budget deficit.
8. He stated that he was open to adopting any new innovative ideas, Republican or Democrat, to make his proposed plan better.

This is what I didn't like in Obama's speech:
1. He listed three main goals of his plan: reduce the ranks of uninsureds, stop insurance abuses, and reduce costs. During the campaign, he always emphasized reducing costs as the primary goal of reforms, which I thought was right on the mark. If health care costs are brought down, many uninsureds will be able to afford to buy insurance and thus the problem of uninsureds will go away over time.
2. His price tag for the plan, $900 billions over ten years, will continue to turn off conservative Republicans and Democrats, especially at a time when federal budget deficit is running at record levels. Most Americans think that any tax increases should be used to reduce budget deficit and not for starting a new entitlement program.

Overall, Obama's speech was very helpful to Americans in understanding clearly what he was proposing and why. I am very optimistic that his speech will prod Democrats and Republicans to work together and hammer out a health care reform bill before the end of this year. Should Congress fail to pass a health care bill this year, Republicans will be blamed for this failure and they will pay a price in the mid-term elections of 2010.

So far, not so good - Obama needs to retool

2009-08-16T13:49:00.019-04:00

Posted by Shyam Moondra

President Obama and his team have badly stumbled on the health care proposal. Here are some observations:
· President Bill Clinton's health care proposal failed because the Clinton administration pretty much took over the job of writing the legislation and the Congress rebelled. This time, the Obama administration just outlined the key requirements and then became completely aloof from the process of writing the bill that was prepared by the members of the Congress with the help of lobbyists. This approach resulted in a draft bill riddled with loopholes diluting the reforms that were originally envisioned. Obama's lack of participation made him look like lacking leadership skills and it became impossible to have a unified message. The critics tore the plan apart, fueling a grass-root rebellion as witnessed at many town-hall meetings across the country.
· During the election campaign, Obama presented him self as a centrist, but the Democrat health care proposal in the House made it apparent that Obama is really a leftist in disguise. A vast majority of Americans are either at the center or slightly to the right of the center, so once it became clear that Obama was really a liberal, his support among the Democrat conservatives and Independents plummeted.
· During the depression of the 1930's, when people were suffering tremendously, President Franklin D. Roosevelt was able to push through his liberal agenda of starting new entitlement programs or creating what he called a "safety net." Some on the Obama team thought that, given the suffering among the masses because of the current financial crisis, they could push through a health care entitlement program costing $1 trillion for the first ten years. That approach seems to have backfired.
· Obama's superb speech making skills are not enough – he needs to be more hands-on. He needs to roll-up his sleeves and sit down with the Congressional leaders to hammer out the details of new bills rather than become completely detached from the whole process. In other words, he needs to do more walking than talking – people are tired of his speeches, press conferences, video blogs, and on-camera pronouncements.

The poor performance by the Obama team on the health care has far reaching consequences:
· Democrats could lose the control of the Senate and House in 2010, as happened during the Clinton's first term when his plan for universal health care coverage was rejected by the Congress. If Obama loses the support of Independents, he would not be able to win re-election in 2012, although it's too early to talk about that.
· Obama's other initiatives on climate change, education, regulatory reforms, energy independence, etc. may now be in jeopardy.
· If Obama is perceived as weak at home, it will embolden our adversaries abroad that would have negative security consequences for us and for our allies.

In general, the American people have the following core beliefs:
· They believe that the government is too inept to be able to run a program efficiently. Case in points, Amtrak and United States Postal Service – they both would go bankrupt if the government didn't bail them out. Even Medicare and Medicaid are fraught with corruption and fraud by service providers.
· The government can't be entrusted with their personal data and they would certainly not like the government to make any life and death decisions. The people simply don't like governmental intrusion in their personal lives, period.
· Those who work hard must be allowed to reap the fruits of their labor. They vehemently oppose the idea of government's taxing the rich and using that money to provide "free" services to the poor. They reject the idea of income re-distribution by the government in any form.
· They don't like a welfare state. The best thing that Clinton did was to dismantle the welfare programs that made many poor people too dependent on the government welfare checks, to the point that many poor people found it more profitable to remain unemployed. The American people oppose any Obama attempt to resurrect a welfare state.

So, where do we go from here?
· First, some changes within the White House are inevitable. To regain the trust of the American people, Obama needs to make personnel changes amongst the ranks of his advisors and perhaps some cabinet secretaries.
· Obama will be helped if the House Speaker Nancy Pelosi is replaced. She is far more to the left than Obama is and that's a real political problem because most of the population is more centrist. It would also help if some of the committee chairpersons in the House and Senate are also replaced by more younger, energetic, and innovative leaders.
· Scrap the existing health care proposals and start all over. Obama needs to focus on reducing health care costs and reforming insurance abuses and guarding against their greed. Obama should refrain from proposing any new expenditures (the people are not at all in the mood of starting any new entitlement program when the budget deficits are running at record levels – if we ever become prosperous again, we can reconsider new health care expenditures at that time but not right now).

Proposed health care plans are off track - intense opposition is genuine

2009-08-05T10:07:00.024-04:00

Posted by Shyam Moondra

Most Americans thought the objective behind the proposed health care reform was to reduce costs by at least 30%. That means, a family that spends $6,000 on health care today would spend no more than $3,500 under the new plan. The idea was that if the costs came down, many uninsured people, who can't afford to buy medical insurance today, would be able to afford insurance and thus the ranks of uninsured will shrink. However, now it looks like the health care initiative has been hijacked by those who are pushing for universal coverage (read that as creating new entitlement programs). Rather than focusing on how to reduce costs, the debate is now centered on how to pay for new spending of $1 trillion over the next ten years (and perhaps more later) to cover every American. The universal coverage will be achieved by expanding the existing Medicaid program for the poor and by providing subsidies to those who are not "poor" but can't afford to buy medical insurance. Mandated health care would also lead to financial difficulties for those who don't qualify for Medicaid or other subsidies. The people are genuinely concerned that the proposed plan will in fact increase their health care costs and they will be worse off than today.

An overwhelming majority of Americans don't want any new entitlement program and they certainly don't want to spend $1 trillion, especially at a time when the federal budget deficit is running at a record level. And that explains the intense opposition by a majority of Americans to the proposals currently under consideration by the Democrats. As the people learn more and more about the details of the proposed reforms, the opposition grows exponentially, as is evident from the recent opinion polls. It would be a mistake to label the growing dissatisfaction as something instigated by the Republicans.

President Obama says that either we do the proposed health care plan or maintain the status quo (meaning costs will keep rising). However, that's a false choice. The American people are saying that we need to do health care reforms but without creating a new costly entitlement program - they just want to make some structural changes that will bring down the health care costs.

The present bills being considered in the Democrat controlled Senate and House should be scrapped and the lawmakers should go back to the drawing board. The Congress should focus on how to bring down costs by making appropriate structural changes in how health care is delivered to the American people. Below are a few examples what the Congress could do:

· Offer an optional government plan to induce more competition in the industry. This option will provide an added protection if the other methods of cost reductions don't work.
· Change the mal-practice laws so that doctors and hospitals will be able to lower their charges and they will not have to over-prescribe tests and treatments, thereby reducing costs. The current House bills do not touch upon the issue of tort reform, apparently because of the opposition of the trial lawyers who contribute heavily to the campaign coffers of the Democrats.
· Change drug patent laws to enable generic offerings sooner. Allow re-importation of drugs from Canada and Mexico. Under the government plan, negotiate lower drug prices.
· Reform insurance industry and regulate their profit margins (just like profits of utilities are regulated). Ban unfair practices such as charging more for or denying insurance for pre-existing conditions.
· Make the necessary changes in how the insurance is structured, so that the patients would be induced to weigh in the costs involved when choosing service providers or making decisions on treatment alternatives, just as they would when buying any other product or service. Incentives to save money will encourage patients to shop-around which would create a truly competitive environment and keep a lid on the prices.
· Eliminate health care system inefficiencies. Today's record-keeping procedures tend to be cumbersome that add to the health care costs. The government could help develop a comprehensive solution that takes advantage of the modern information technologies.

I don't think we need to undertake a grand plan and waste tax dollars. The widespread opposition to the Obama approach is genuine and if Democrats go ahead with this ill-conceived approach of universal coverage, they will pay dearly in 2010 when they could lose the control of the Senate and the House.

Investment strategies for the near-term

2009-08-01T05:29:00.022-04:00

Posted by Shyam Moondra

Emerging economic trends are very encouraging. While unemployment rate remains high and consumer confidence is still in the doldrums, there are many signs that suggest that the recession may be over. For example:
· In the second quarter of 2009, the GDP declined by only 1%.
· New and previously owned home sales in June increased, thanks to low mortgage interest rates and about 30% lower prices from the peak set in 2007. The latest housing report showed a small increase in the average home price, indicating that the long slide in home prices have finally come to an end.
· Leading indicators went up three months in a row, strongly suggesting that the economic recovery is underway.
· Inflation remains under check, enabling the FED to keep interest rates low for the foreseeable future. Low interest rates will fuel the economic growth.
· The banking system has stabilized, as is evident from better than expected profits reported by many banks and steadily improving credit markets. Some banks are still in poor condition (but less critical than six months ago) because of continuing foreclosures and losses in commercial real estate and consumer credit card markets.
· In general, in the first half of 2009, corporate profits far exceeded analyst estimates. The private sector has done an excellent job in controlling inventories and costs. The mean and lean private sector is well positioned to rapidly expand profit margins as demand perks up in the coming quarters.

Looking forward, the federal stimulus program will continue to boost the economy. The $787 billion stimulus package was to be spread over the 2009-2010 period; therefore, as much as 80% of the stimulus money still remains to be spent in the coming six quarters. A big part of the remaining stimulus program will be directed to infrastructure projects that will create new jobs. The Congress just added another $2 billions to the enormously successful "cash for clunkers" program, which gives as much as $4,500 to consumers if they trade-in their old gas guzzlers for new fuel-efficient cars. This program will give a much-needed boost to the auto industry. In spite of the encouraging economic trends, the unemployment rate will not decline any time soon. However, consumers, who have been lately saving more than spending, will loosen-up the strings of their purses and thus provide the fuel for the economic growth engine.

Given that we are on our way to recovery, the stock market is again attracting investors that have trillions of dollars sidelined in safe investment vehicles such as Treasury bills and notes. That money will steadily move into the equity markets. A Dow Jones Industrial Average of 12,000 by early 2010 does not seem far fetched.

Many stocks are currently priced very attractively for the long-term gain, starting with the companies in the consumer sector. Companies that have had the steepest decline in their stock prices over the last twelve months will likely appreciate the most. Investors should start nibbling at selected stocks every time the market dips. Following are some of the segments to focus on:

· Consumer non-durables and discretionary goods/services including fast food restaurants.
· Travel and leisure: Airlines, hotels, and casinos.
· Machinery: Stimulus spending for infrastructure projects will increase profits for heavy machinery companies.
· Industrial: Aluminum, chemical, aircraft manufacturers.
· Media: Television networks and Internet companies (ad revenues will gradually increase).
· Selected financials: Financial companies that were beaten down hard will provide the best returns, although they may still be somewhat risky.
· Transportation: As the economy improves, air frieght, railroad, shipping, and trucking companies will do well.

Future challenges remain just as daunting as they were six months ago. As the economy starts growing, consumer and industrial demand will steadily grow, increasing inflationary expectations. Starting next year, the FED will have to start raising interest rates; it will be a challenging job for the FED to not increase interest rates too fast or too early that might choke off the economic growth. That balancing act will require the brilliance of the FED Chairman, whoever that might be coming January of 2010. The Obama administration and the FED will have to wind down financial stabilization programs and stimulus expenditures, and start focusing on how to reduce the budget deficit. Increasing income taxes for the super rich and closing-down tax loopholes for the corporations (e.g., off-shore tax havens) will be necessary to balance the federal budget.

A beer party at the White House

2009-07-30T00:50:00.013-04:00

Posted by Shyam Moondra

Today, President Barrack Obama is meeting over beer at the White House with his friend Henry Louis Gates, Jr., a Harvard professor, and Sgt. James Crowley of Cambridge (Mass.) Police Department to smooth over any misunderstandings resulting from the June 16th incident that ended up in Crowley arresting Gates for disorderly conduct, a charge that was later dropped.

On June 16, 2009, Gates (a black man) returned from a trip to China. He couldn't open the jammed door of his home so he and his car service driver (a black man) tried to push the door with their shoulders. A passerby, Lucia Whalen (a white woman), saw what was happening, so she made a 911 call to report this as a possible break-in attempt. A few minutes later, Crowley (a white man) came to investigate by which time Gates was already inside his home and the car driver had already left. Gates, a race relations expert, was angry at being asked to prove his identity in his own home and perceived this as a case of racial profiling. Crowley ended up arresting Gates for disorderly conduct and led him away in handcuffs. A few days later, Cambridge Police Department dropped the charge. Obama, when asked by a reporter at his press conference about the arrest of Gates, commented that he didn't have all the facts but he thought that the police acted "stupidly." That comment led to a huge political uproar drawing protest from law enforcement organizations and conservatives, drowning out Obama's message on his number one priority, the proposed health care plan. Obama returned to the White House briefing room and admitted that he could have worded his reaction better and revealed that he invited Gates and Crowley to meet over beer at the White House to talk about the incident and smooth over any misunderstandings.

Based on what we know, this is what I think about the persons involved in this whole thing:

· Obama: Being a black president, it is understandable that he is very sensitive to the issue of racial profiling, especially when one of his friends is involved. However, he was wrong to draw a conclusion (that the police acted stupidly) before he had all the facts. The choice of word ("stupidly") was not appropriate – it made him look un-presidential. However, once Obama realized that his remarks created a political backlash, at a time when he was trying to drive his message on his health care plan, he promptly met with the reporters to admit that he made a mistake. That was a gutsy move because presidents rarely admit that they made mistakes. Some people have questioned whether he should have commented at all on a local police incident. I think if it were proven that the incident involved race profiling then it would be appropriate for the president to talk about this. However, organizing a beer party at the White House seems like going too far – Obama has lot more important things to do than to try to smooth things over between Gates and Crowley. Well, now he has to deal with yet another controversy surrounding his choices of beer that will be served at today's meeting - domestic brewers are upset that the White House will be using beer manufactured by three foreign owned companies. I give Obama a "B."
· Gates: As an expert on race relations at Harvard, he saw his confrontation with Crowley as a case of race profiling. That thought led him to behave uncooperatively at a time when he should have been more understanding and he should have kept his cool. Crowley received a tip on a possible break-in, so he had no choice but to verify Gates' identity – that was proper police work. I give Gates a "C."
· Crowley: He may have acted by the book, but, clearly, he fumbled his job here. He should have been more patient and tolerant. He should have been mindful of the fact that Gates was angry because he was being asked to prove his identity in his own home (would not Crowley feel the same way, if he was in Gates shoes?). There is no indication that Gates was violent, so after he showed his identification cards, Crowley went too far in arresting Gates and hand-cuffing him for disorderly conduct – a charge that would not have stood a chance in a court of law (the police department was wise to drop the charge a few days later). You can't arrest a man because he is rude to the police. Would Crowley have arrested Gates, if Gates were a white man? Was Crowley simply showing off his police power or was he being racist? We will never know. Crowley wrote in his report that Whalen told him at the scene that she saw two black men – an assertion not supported by the 911 call transcript released by the Cambridge Police Department. I give Crowley a "D."
· Whalen: It's not clear if she did the right thing by reporting what she saw to the police in a 911 call. The call transcript indicates that she saw two pieces of luggage on the porch and she even speculated that the men could be living there and they may have been just trying to open the jammed door. The transcript also indicates that she didn't know if Gates was white or black or Hispanic, although she did say that one man (the car driver) looked like a Latino. The question I would have is if she would have done the same thing had she seen two white men trying to open the jammed door. We know how she would answer that question. Since we don't yet know much about her motivation in making the 911 call, I give her an "Incomplete."

Obama's poor execution may sink his approval rating

2009-07-05T20:41:00.018-04:00

Posted by Shyam Moondra

Since Barrack Obama became the president, he has been saying all the right things. However, Obama's mode of operation has become an obstacle in achieving the desired end-results of his policies. Consequently, Obama's popularity has declined somewhat and is about to crash down unless he improves his execution.

Bill Clinton's presidential campaign strategy was based on "it's the economy, stupid" that led to his astounding victory over George H. W. Bush. After the election, Clinton exclusively focused on economy and he especially avoided making foreign trips. He even resisted getting involved in Kosovo as long as he could. His hands-on approach in formulating and executing economic policies paid off handsomely - he turned the budget deficit into a surplus and the American people enjoyed the longest period of prosperity in the modern history. Now we have a much more serious economic crisis but Obama has been spending way too much time traveling around the globe. When people are losing their jobs and homes at the fastest rate since the depression of the 1930's, it's hard to justify Obama's extensive travel plans. Surely, Obama has improved the image of the U.S. that was battered during the Bush years, but, at the moment, that's not what the American people want him to focus on - they want him to stop the bleeding of our economy.

One of the other operational problems Obama has is his desire to be in front of the cameras at all times. He suffers from overexposure because of his constant interviews, press conferences, speeches, video blogs, etc. The American people would rather see him working at his desk in the oval office and be focused on execution of his economic policies. Obama likes to tell Congress that he wants this or that by so and so date, and then becomes somewhat aloof from the process. The Congress then writes the legislation with the help of lobbyists, who are likely to insert all kinds of loopholes, diluting the reforms that were expected from the legislation. The case in point, the health care legislation - we keep hearing that Obama's original vision has been riddled with all kinds of concessions sought by the lobbyists that raise the question if the proposed legislation will achieve its originally stated goal of significantly reducing costs (in fact, the Congress is talking about imposing new taxes worth $1 trillion to pay for this proposed plan!). During the campaign, Obama promised he would reduce the role of lobbyists in the government, but right now just the opposite is happening. Why not Obama roll up his sleeves and sit down with the Congressional leaders and hammer out legislation rather than let the lobbyists write the laws? The American people want a more hands-on approach from Obama in lieu of his non-stop TV appearances and pronouncements.

Obama has been busy proposing a million different things but in the absence of focus and hands-on approach, nothing much is being accomplished – his emphasis is on quantity of things he proposes as opposed to getting things done right in a timely manner. Congress is not used to working on multiple things that fast, so what will come out would be half-baked goods that will not achieve the reforms that were originally envisioned. May be Obama could get done more by focusing on a fewer things at a time so that he can devote more time in executing things as opposed to proposing things.

Here are some examples of how Obama's poor execution is becoming an obstacle in achieving the desired results:

· In spite of huge stimulus spending, the economy continues to lose jobs and the unemployment rate continues to rise. The loss of jobs means more and more homeowners are joining the ranks of who can't keep up with their mortgage payments. That leads to more foreclosures and lower home prices. The American people would like to know why economy is not getting a lift from increased government expenditures – is it because the stimulus money is not being spent fast enough or the stimulus package was flawed? The proposed budget will sharply increase the national debt, so it is important to properly analyze why increased expenditures are not generating more jobs. Shouldn't Obama be focusing on analyzing the stimulus package and deciding what to do next?

· Foreclosures continue to be at near record levels. Shouldn't Obama take another look at homeowner assistance programs and come up with changes in the approach? Mortgage rates went up in recent weeks shutting down the refinance market - shouldn't Obama do something to bring down the mortgage rates to stimulate the demand for the houses? Economic turn around is contingent upon stabilizing the housing industry first.

· Oil prices have doubled in the last few months. Congress had a lot of hoopla when oil hit $150-a-barrel and it talked about reforming CFTC, limiting investment by speculators in oil and other commodities, eliminating the "Enron loophole" etc but nothing has happened. Why is Obama not doing anything about this? When commodity prices on the futures market go up and down by 100% or more in short periods without any change in the underlying fundamentals, then clearly something is very wrong with the way the markets operate.

· The outlandish executive compensation was a major issue during the campaign, but Goldman Sachs and Morgan Stanley just announced that they would put aside tens of billions of dollars for 2009 bonuses that is 50% more than the amount set aside for 2008 bonuses. Why has Obama not done anything on this issue? We need a law to limit CEO compensation at all publicly held companies, not just TARP companies.

· Everybody knows that investment banks and hedge funds manipulate the stock markets. There have been a lot of talk about twenty-first century regulatory reforms but nothing concrete has yet come out and market volatility continues to be an obstacle in getting the economic house in order. We need to clamp down on computerized day trading by investment banks and hedge funds that are destroying our markets.

· With the huge increase in government spending, the budget deficit is ballooning rapidly that almost guarantees that interest rates will go up in the coming months. Why has Obama not announced concrete plans on how the budget deficit and national debt would be brought down?

If Obama doesn't change his mode of operation and exclusively focus on deteriorating economy, his approval rating will crash in coming weeks and months. Obama has a real opportunity to be a great president but he is blowing it away by not being on the top of things in seeing that the economy rebounds quickly.

The U.S. foreign policy challenges for the world's troubled spots

2009-06-24T17:34:00.022-04:00

Posted by Shyam Moondra

President Barrack Obama's handling of four major foreign policy challenges generally gets high marks. By nature, Obama tends to be cautious which usually is the right way to handle crises, except in some cases where his overly cautious approach makes him appear timid. Overall, Obama has demonstrated an even temperament and is on the right track. Following are the troubled spots, starting with the one with the most successful execution and ending with the one that could have been handled a little better.

Pakistan-Afghanistan:

Obama's firm policy on Pakistan, making financial and military aid conditional upon Pakistan's getting tough on extremists, is paying off. Of course, this policy was helped with the Taliban's strategic blunder in attacking Islamabad that triggered the alarm among Pakistanis and the rest of the world that the nuclear arsenal could fall in the hands of Islamic extremists. Pakistani civilian and military leaders deserve credit for rising up to the challenge and doing an incredible job in driving out the extremists from the Swat Valley. Many of the local tribal militias, fed up with the destruction that the Taliban brought to their communities, are also teaming up with the Pakistani military in driving out the Taliban from their villages and cities. Pakistan is now focusing on South Waziristan, the stronghold of the Pakistani Taliban and Al Qaeda, so this is still work-in-progress. If Pakistan continues to show resolve and finishes the job of flushing out the militants there, the U.S. should resume financial and military aid to Pakistan, as promised. However, the aid must be focused on strengthening the Pakistani democratic institutions and providing services to the Pakistani people. The U.S. must refrain from using the aid money to provide offensive weapon systems to Pakistan that could potentially be used against India and destabilize the region. The U.S. should also insist that Pakistan dismantle the training camps of Kashmiri extremists that carried out the terrorist attacks in Mumbai recently, thus paving the way for peace talks between India and Pakistan to finally settle the Kashmir issue.

Obama is correct in strengthening the military capabilities of NATO to root out the Taliban extremists from Afghanistan. Obama is also correct in impressing upon the Afghanistan's government that Afghanistan's future depends on eliminating government corruption, strengthening Afghanistan's security apparatus, providing services to the people of Afghanistan, and dismantling the drug trafficking infrastructure. Like in Iraq, we need to have an exit strategy so that eventually we can leave that area and let Afghanistan's people govern themselves without the presence of the NATO forces. We need to develop a plan which would enable us to start withdrawing our forces within five years.

Middle East Conflict:

Obama deserves credit for drawing a line in the sand on the issue of the Israeli settlements in the occupied territories. Israelis have consistently behaved as if they want to maintain the status quo, meaning continue to build settlements on occupied lands and keep collecting billions of dollars in the U.S. aid without giving any consideration at all to the suffering of the Palestinian people. That policy has served the interests of Israelis, as is evident from the considerable improvement in their living standard, but at the expense of Americans (who paid a heavy price over the years including the September 11, 2001 attack on our soil) and Palestinians, who have been forced to live in sub-human conditions. Obama is right in taking a more impartial and moral approach in resolving this longstanding conflict in a fair way. Israel must surrender the occupied territories in exchange for recognition of Israel by all Islamic countries in the region. Palestinians must have their own free sovereign country because that is the right thing to do. Obama should make financial and military aid to Israel conditional upon achieving the two-state solution as soon as Palestinians are ready with the governing institutional infrastructure in place – we need to increase the cost to Israelis for any unreasonable delay in achieving a comprehensive solution in the Middle East. Resolution of this conflict is essential for improving the relations between the U.S. and the Muslims and for de-radicalizing the Islamic world. Obama must be prepared to impose a solution if Israelis and Palestinians fail to achieve one on their own.

Now that the Obama administration has decided to reestablish diplomatic relations with Syria, it's important that Israel and Syria settle their conflict over the Golan Heights. If Obama continues to proceed on all Middle East issues in a fair and impartial way, it is conceivable that a comprehensive agreement involving Israel, Palestinians, and Syria could be hammered out within the next two years. If that happens, all Arab countries and Iran should recognize Israel and establish diplomatic relations with the Jewish state.

Iran:

A vast majority of the younger population of Iran is challenging the unelected mullahs that took over the government in the aftermath of the 1979 revolution. The Islamic revolution is failing because it has not evolved with the changing times of the Internet era and because of its rigidity that's unacceptable to the younger generation. Iranian authorities appear to have successfully used extreme violent means against its own people to stop people's peaceful protests against the fraudulent election that gave the incumbent President Mahmoud Ahmadinejad a big victory. However, the country is now fractured. The dreadful image of Neda Agha Soltan, a young woman, who was shot dead by a government militiaman, is way too powerful for the people to ignore. Only time will tell if the sacrifices made by the courageous Iranian people will bring any positive changes in Iran. If history is any guide, dictators, who oppress and terrorize people using their militias (or thugs, as many people would call them), eventually fall. It would be hard for Ahmadinejad to survive as a president, if he is viewed as illegitimate, not just by the outside world but by the Iranian people themselves. Hopefully, what will come out of the popular dissent is a reformed moderate Islamic government that will provide more freedoms to its people and the press and treat women with equality.

President Obama's approach to the Iranian crisis has been the right one. Obama could have used hard-hitting rhetoric, but that would not have changed the situation on the ground there. The fight for freedom has to be fought and won by the Iranian people themselves. Obama's strong condemnation of the violent means used by the Iranian authorities against peaceful demonstrators was all he could do under the circumstances. By not directly commenting on the election process itself and focusing on the brutality of the Iranian police, Obama has taken a high moral road. This approach has given Obama an upper hand in any future negotiations with much weakened Ahmidinejad. There seems to be a good chance that Iran will agree to a deal whereby it continues with the civilian nuclear program with appropriate U.N. monitors and inspectors in place to make sure that they do not pursue a clandestine weapons program. In return, all sanctions against Iran will be dropped and Iran's isolation will end. A country, which is not isolated, is more likely to play a constructive role in addressing the problems of mutual interest.

North Korea:

Obama has had mixed success on the question of North Korea. The U.S. was able to get an anonymous vote in the U.N. Security Council on the resolution that imposes tougher sanctions on North Korea. However, North Korea has not only conducted a second nuclear test but has also fired more missiles in defiance of the demands of the international community.

North Korea has apparently calculated that the U.S. is tied down in Iraq and Afghanistan and thus would have no stomach for initiating yet another bloodier military confrontation with North Korea. North Korea may have planned all along, while still participating in the Six-Party talks, they will continue with their nuclear weapons and medium- and long-range anti-ballistic missile programs. The nuclear weapon and missile technologies may become a trophy in their hugely successful armament export business. By selling illicit technologies and weapons to other countries such as Iran, Syria, and Venezuela, in violation of the Non-Proliferation Treaty, they can earn badly needed hard currency that they use to buy the essentials for their population.

North Korea is militarily much stronger than Iraq with proven missile technology and possibly a few nuclear bombs. A military option is thus not viable. North Korea's economy is in bad shape. Therefore, if the international community is able to choke off the armament sales and thus shutdown this source of hard currency, it would be virtually impossible for North Korea to survive as a self-sustained country for long. Also, the banking sanctions will bite the elite members of the government, making them more agreeable to reach a negotiated settlement incorporating the following elements:
· Nuclear and missile weapon systems and development efforts to be shut down in a verifiable way and North Korea to fully comply with the Non-proliferation Treaty.
· The West to establish diplomatic relations with North Korea and provide security guarantees.
· North Korea be given economic development aid and supplied with much needed food and energy.
· North Korea to agree to respect human rights and grant its people more freedoms.
· Emphasis be placed on people-to-people contacts, cultural exchanges, and tourism (providing another source of hard-currency).

Financial markets today are not random, nor efficient, nor rational, but they are manipulated

2009-06-15T11:20:00.020-04:00

Posted by Shyam Moondra

Over the last few decades, the economists have variably characterized the financial markets as random, efficient, and rational. However, in the last ten years, with the emergence of computerized day trading by investment banks and hedge funds and increased trading in derivatives, the true characterization of the markets today would be "manipulated."

It's a well-known fact that today's increased volatility in stock and commodity markets is primarily due to manipulation by investment banks and hedge funds through their frantic computerized trading. Jim Cramer, a TV commentator, once posted a video on his website explaining how he, as a former hedge fund manager, used to throw $25 millions or so and move a particular stock up or down as he wished. The investment banks and hedge funds short sell a stock to push it down (often spread false rumors about the targeted company to aid the process of bringing it down as was done in the case of Bear Stearns and Lehman Brothers) while also trading in options. Then just before the monthly options are to expire, they start covering their short positions and push the stock up. In the process, they may lose some money in trading stocks but they make proportionately more money in options and thus come out ahead. Sometimes they move a particular stock up or down to make the options they wrote worthless and thus pocket the premium the buyers paid. They repeat the process every month in many targeted stocks and make money at the expense of unsuspecting small investors. Some of these big players also use what is known as "pump-and-dump" strategy in which they take substantial long position in a company, usually a lesser-known small-cap company, and then publish inflated views or research reports about those companies that help move the stock price up ("pumping"), enabling them to sell their holding at a profit ("dumping"). Often, investment banks issue a positive research report to pump-up a stock so that their best clients can dump the stock, or issue a bad report on a stock to push it down so that their best clients can buy that stock. Some times these big players use their research departments to make money in the trades for their own accounts. As an example, Goldman Sachs' research department was touting that oil was headed to $200 per barrel while at the same time they reportedly held long positions in oil. It's also reported that some investment banks were selling mortgage-based securities to others while at the same time they were short selling those securities.

The investment banks and hedge funds call the above trading practices as "investment strategies" and deny that they are engaged in unlawful manipulation. The fact is that if a market player can make a stock or commodity move in a certain direction at will, then that's manipulation.

The stock markets were created to help companies raise capital so that they could build new factories and hire more workers and the stock prices moved up or down based on the companies' fundamentals. Now the markets move up or down in a yo-yo fashion without any change in underlying fundamentals. The increased volatility caused by manipulation in the markets has turned the markets into gambling casinos, hurting the free-market economic system.

We urgently need new regulations to stop market manipulation by the investment banks and hedge funds. The government could take a number of actions such as:
· Ban naked short selling, limit short positions to 1% of outstanding shares at any given point in time, and reinstate the "up tick" rule for short selling.
· Regulate hedge funds like any other mutual fund. Their CEOs and other officers must pay taxes at the regular rates as opposed to at the capital gains rate as they do now.
· Investment banks and hedge funds must be required to hold stocks they buy for a certain specified minimum period before they can sell those stocks. Or, as Louis Gerstner, the former CEO of IBM, has suggested, short-term gains should be taxed at a hefty rate of 80%, which will discourage day trading and thus reduce volatility.
· Change the margin rules so investment banks and hedge funds are limited to leverage of no more than 10:1 (in the recent past they have had leverages of up to 40:1).
· Impose a limit on how much options trading investment banks and hedge funds can do in any given stock.
· The investment banks must not be allowed to own research business. Currently, they have arm's length relationship between their trading and research departments which is not enough.
· Pass tough laws to discourage "pumping-and-dumping" so that big players can't make money at the expense of small investors.
· Strengthen SEC resources to investigate and enforce the laws vigorously to stop market manipulation. The CEOs of the companies that are found to violate any of the new regulations must be given mandatory jail terms and their companies must be fined heavily to discourage them from manipulating the markets.
· Change the tax laws to stop investment banks and hedge funds from escaping from paying their fair share of income taxes. In a recent quarter, Goldman Sachs paid only 10% in taxes because they executed their trades through a complex web of offshore subsidiaries and hedge funds that made it possible for them to reduce their tax levies. It's time we close all these tax loopholes.
· Put restrictions on how much commodities investors can buy. It's believed that the recent sharp oil price increase was not because of imbalances in demand and supply but was driven by speculators.

Health care reforms must reduce costs by at least 30%

2009-06-14T12:05:00.018-04:00

Posted by Shyam Moondra

President Obama has made health care reform as his number one domestic policy goal. Obama and others talk about two major problems related to health care: the swelling ranks of uninsureds and rapid increase in the health care cost. In fact the sharply escalating health care cost is the primary reason why millions of people can't afford to buy health care insurance. Therefore, if the Obama plan is able to bring down the costs by at least 30%, the problem of uninsureds will dissipate. Those who are too poor to pay for health care could be dealt with as a separate issue as part of the reforms concerning the Medicaid program.

The main reasons why health care costs are increasing at a much faster rate than the overall inflation and what could be done about them are as follows:
· Unchecked greed of service providers such as insurance companies, drug manufacturers, hospitals, and doctors. The industry environment permits the service providers to increase the rates as they please to earn a hefty profit. They are treating health care as a cow they could milk to the hilt. This issue could be addressed by introducing a non-profit government administered plan or by regulating the profit margins of the service providers in the same manner as many of the utilities are regulated today.
· Insufficient competition in the industry. There appears to be a conspiracy among the service providers when it comes to pricing their products and services. If a government sponsored plan is introduced, it will force the competing carriers to moderate their pricing policies. We could also have new anti-trust regulations specifically designed for the health care industry. In addition, we need to reform the patent related laws to permit the introduction of generic drugs sooner.
· Unnecessary tests and treatments. Doctors often prescribe tests not because they are really needed but just to protect themselves from potential malpractice lawsuits. The fear of lawsuits drives them to be 100% sure on all aspects of health care. This "care-to-perfection" is often unnecessary and it adds to the costs enormously. Doctors and hospitals collude to push for expensive surgical procedures that yield more income for them even though there may be cheaper alternatives available that would be just as effective. This issue could be addressed by reforming the malpractice laws and by developing standards for medical treatment.
· Patients' attitude of indifference. The patients often ignore the costs so long as a treatment is covered by insurance (even though this eventually ends up costing them more in terms of higher insurance premium and co-pay/deductibles). We need to come up with a plan which will induce the patients to weigh in the costs involved when choosing service providers or making decisions on treatment alternatives, just as they would when they buy other non-health care products and services.
· Health care system inefficiencies. The paperwork and record-keeping procedures tend to be cumbersome that add to the health care costs. The government could help develop a comprehensive solution that takes advantage of the modern information technologies.
· Lack of medical knowledge on the part of population. People often end up seeing a doctor or not being able to make wise treatment choices because they are not knowledgeable enough about medical care. We should make education about medical care and prescription drugs for common ailments mandatory for most people. If people achieve the required level of understanding about medical care, they should be awarded a certificate which would allow them to get certain medicines (e.g., antibiotics) without a doctor's prescription. If people are able to treat common ailments such as cold, diarrhea, heartburn, constipation, high blood pressure, etc. they will have fewer visits to doctors and thus reduce the cost of health care. If people can learn how to repair automobiles, I am sure they can also learn how to treat common health problems themselves.

The escalating health care costs are negatively impacting families and businesses alike. Up to this point, in the face of government inaction on this issue, many employers are washing their hands off this problem by cutting back employee/retiree's health benefits and increasing co-pay and deductibles. The escalating health care costs are also making American companies less competitive in the global market place. The Obama administration is thus correct in making health care reform as the number one priority. Republicans must work together with Democrats in an objective manner, free from any pre-conceived ideologies, to reign in the health care costs. Any proposal that doesn't reduce the health care costs by at least 30% should be viewed as a sham. In the next round of elections, the American people would not hesitate to punish those who are creating obstacles in achieving meaningful reforms.

Headed for a second round of economic slowdown?

2009-06-11T09:54:00.015-04:00

Posted by Shyam Moondra

Economy seems to have stalled. Look at the following trends:

· While the number of new weekly unemployment claims is going down, it is still very high (in the 600,000-range) and the total number of people receiving unemployment benefits continues to rise, currently standing at little under 7 millions. It's now almost certain that the unemployment rate will exceed 10% and may even go over 11%.
· While the latest retail sales data for May shows an increase of 0.5%, that increase reflects a burst of auto demand generated by the tremendous bargains being offered by the auto dealers many of whom are going out of business and are in the process of liquidating their inventory (but these bargains can't be sustained indefinitely) and higher gasoline prices (consumers are buying the same amount of gasoline but paying more). Therefore, the consumer demand is not quite as robust as the retail sales data might suggest.
· In recent weeks, the prices of oil and other commodities have increased substantially, raising the specter of inflationary expectations. These price increases are being driven not by any demand-supply imbalances but because of speculative purchases by investors. Oil and gasoline prices are now double of what they were a few weeks ago, crimping consumer spending.
· Interest rates have started to increase with the 30-year fixed mortgage rate now almost 25% higher than what it was a few weeks ago. Higher interest rates have already stalled the mortgage refinance activity. The number of foreclosures continues to be at near record levels and as the interest rates rise even more, this number will only get worse. All of these trends will have a negative impact on the home sales and home prices in the coming weeks and months. Recent stress tests conducted by the Department of Treasury may require financial institutions to raise additional capital in the future, thereby slowing the financial market's recovery.
· Dollar is plummeting, diminishing its role as the world's reserve currency. The creditor countries such as China may be reluctant to invest in the U.S. securities at the same level as they used to, driving up the interest rates even more which will delay the economic recovery. While a weak dollar may stimulate exports, it will also lead to higher import prices which will aggravate the inflation problem.
· The trade and budget deficits are increasing which means weaker dollar, higher oil and commodity prices, and higher interest rates down the road.

The Obama administration has been too slow in spending the stimulus money. Congress has been too slow in finalizing the regulatory regime for the twenty-first century. Deteriorating economy combined with speculative trading by investment banks and hedge funds could trigger an economic crash. President Obama has been spending too much time on overseas trips and his absence has hurt the economy. In the beginning he was a hands-on president, but lately his execution on economic matters has been sub-par. Obama and Congress need to come up with a new plan, perhaps another stimulus package, or else we are likely to have a relapse of an economic slowdown.

All is well, if it ends well – a perspective on Obama's first 100 days in office

2009-04-29T08:37:00.013-04:00

Posted by Shyam Moondra

Today marks the first 100 days of Barack Obama as the President of the United States. He has moved briskly on a number of fronts fulfilling his election campaign pledge of bringing change to America. There were some early missteps in the selection of certain people for cabinet posts, but Obama recovered quickly. Overall, Obama has had a very good start comparable to those of the greatest presidents such as Franklin Roosevelt. However, in the end, his presidency will be judged not based on how good a start he has had but how well will it all end.

President Obama didn't wave a magic wand and fixed the dire state of economy (yet), but he accomplished two big things: he brought a sense of direction and optimism among the population that has been missing for a long time. A vast majority of people now feels that the country is on the right track. The economy got in trouble because of the unchecked greed on the Wall Street and lack of regulatory oversight. Obama's strong and confident leadership helped calm the nerves of investors. Even though the unemployment rate continues to climb, the American people are now beginning to see the light at the end of the tunnel. A change in perception to neutralize the fear factor was a pre-requisite for a real improvement in economy that now seems to be within grasps.

President Obama may have returned home from his first European trip without getting everything he wanted, but he instantly restored the favorable views of American ideals and values in the eyes of friends and foes alike. And that itself was an impressive achievement. Aside from Obama's brilliant communications skills and supreme self-assurance, his treatment of other world leaders as equal partners will definitely yield dividends in the future. His non-confrontational approach and good listening skills will come handy in resolving the intractable problems of the Israeli-Palestinian conflict and the nuclear programs of North Korea and Iran. Republican ideologues foolishly mocked Obama's exchange of smiles and handshakes with Venezuela's President Hugo Chavez at the recent Latin American summit. In doing so, they missed the point that you have a better chance of resolving misunderstandings and conflicts if you talk to your adversaries rather than avoid them. In the same venue, Obama's offer to start a dialogue with Iranians without any pre-conditions (a big change from George Bush's policy) will make it more likely that an acceptable accommodation on the nuclear issue will be found without resorting to a military action. His speech in Indonesia on relations with the Islamic countries laid the foundation for unradicalizing the Islamic countries and reducing anti-Americanism among the Muslims around the world.

In a short period of just 100 days, Obama did many of the things that he said he would do during the presidential campaign. He has already signed into law seven major pieces of legislation including the stimulus package and the largest spending plan in the history of the United States. Some of the changes were executed via executive orders and new regulations issued by the various government agencies. The following is a roster of Obama's specific accomplishments or work-in-progress:

Domestic Policy:

· He got his stimulus package passed by Congress that included extended unemployment benefits, tax cuts for the middle class, tax credits for first-time home buyers, and aid to homeowners by freezing foreclosures. Lowest mortgage interest rates ever are also making it possible for the homeowners to reduce their monthly interest payments via refinancing. The money saved on interest payments would stimulate consumer spending thereby boosting economy.
· He stayed with the bailouts initiated by the Bush Administration in spite of the overwhelming opposition of the American people. While his bailout actions may have helped stabilize the banking system, the taxpayers paid a huge price for that. There may also have been corruption in the way the money was disbursed. For example, Goldman Sachs, a strong financial institution, received $10 billion under TARP and another $12.6 billion through AIG (full payment for risky bets they made when a 30 cents on the dollar would have been more appropriate at the time). Also, the American people are concerned about government's extreme interference in how the companies are run because ultimately this will unmotivate the employees and, as a result, productivity and profitability of these companies will suffer. We urgently need an exit strategy to bring all of these programs to an end at the earliest date possible.
· He has a good chance of getting most of the things he wanted in his budget plan for health care, renewable energy, education, and infrastructure. These programs will add to the budget deficit and the national debt will go through the roof. We need to increase the taxes on the richest people, who benefited the most under Bush, to reduce the budget deficit.
· He initiated the work on completely reshaping the tax code, eliminating the loopholes that many rich individuals and corporations use to escape from paying their fair share of taxes. The Board led by Paul Volcker will issue recommendations by the end of the year.
· He reversed Bush's ban on stem cell research.
· He made it easier for women to sue for job discrimination.
· He extended health care to millions of children.
· He extended the National Service program.
· He set aside huge tracts of wilderness for federal protection.
· He proposed a nationwide super-speed train system.

Foreign Policy:

· He ordered to close the Guantanamo Bay prison.
· He ordered to not use torture to extract information from terrorist suspects, thereby putting the U.S. in full compliance with the Geneva Convention Treaty. I support releasing the Bush Administration memos on torture policy, but I see no sensible purpose in prosecuting the government lawyers and other administration officials for any past infraction of the international laws. I strongly oppose Congress getting involved in this matter. Congress is the least productive part of the government, so they need to focus on important issues such as health care, energy, and education rather than get distracted by this issue, given that Obama has already changed Bush's policy on torture.
· He kept his promise on having a schedule for the withdrawal of American troops from Iraq.
· He put in place a plan to increase the combat capability of the U.S. forces in Afghanistan where lies the real threat from Al Qaeda and Taliban. While he didn't get more combat forces from France and Germany, they did agree to provide more personnel to train Afghan's armed forces.
· He took a small step towards Cuba by allowing family visits and remittances of money from the U.S. to Cuba. Cuba is a small and impoverished country and it is no threat to the U.S. Obama must take further steps such as dropping the trade embargo leading up to establishing full diplomatic relationship with Cuba.
· He proposed a new policy for Pakistan, increasing financial aid in exchange for more cooperation in combating the extremists. I would rather see that any new aid be handed out in an incremental manner only after Pakistan has met certain benchmarks. The U.S. must also develop a plan to seize Pakistan's WMD in case the present chaos caused by the Taliban becomes more ominous.
· He gave the orders to shoot the Somali pirates and free the American hostage, dispelling many Republicans' fear that Obama is weak and he lacks resolve to deal with the evil people in the world.
· Nothing much happened on the conflict between Israelis and Palestinians. I think it's time for the U.S. to impose the two-state solution on the warring parties rather than let this conflict drag out for another fifty years. The U.S. must make financial aid to Israel conditional upon the progress in resolving this issue once and for all.
· His policy of engagement with North Korea and Iran is correct and his foreign policy team needs to get going on both of these issues. I think Secretary Hillary Clinton should visit Pyongyang and Tehran for high-level direct talks, leading up to establishing diplomatic relations with both countries in exchange for full accounting of WMD programs and appropriate verification procedures.
· His policy of putting missile defense in Poland and Czechoslovakia on hold is correct but in exchange Russia must agree to leave Georgia and do away with this cold-war era mindset of having a zone of influence covering the old Soviet Union countries. Regardless, Obama is right in initiating negotiations with Russia on the reduction of nuclear arsenal.
· He reversed Bush's policy on global warming and the U.S. is now fully committed to working with the United Nations on reducing gas emissions and the carbon footprint.

While Obama is methodically going about fulfilling his campaign pledges, Republicans are divided with no clear spokesman. At the moment, the right-wing extremists seem to have the upper hand, which is not helping the Party. Sen. Arlen Specter of Pennsylvania, a moderate, defected to the Democratic Party which is a tremendous loss for the Republican Party. Republicans also suffer from very weak leaders in the Senate and House. Given Obama's dominance and ineffective Republican opposition, the Republican Party is unlikely to do well in the next round of elections. Republicans need to do away with their ideological tendencies and pursue more pragmatic policies to regain the confidence of the American people.

So Obama had a good start and he seems to be doing quite well in opinion polls with an approval rating of 68%. However, this love-fest could end just as quickly, if the economy doesn't improve in the coming months. Unless his policies lead to tangible results soon, a brilliant start wouldn't amount to much. The Obama administration badly needs a little bit of luck in turning around the housing industry and thus the economy, implementing his health care plan, defeating Islamic extremists in Afghanistan and Pakistan, resolving the nuclear issues with North Korea and Iran, and settling the Israeli-Palestinian conflict once and for all. If Obama accomplishes all of that, he will be a shoe-in for a second term to tackle the long-term issues of energy independence, Social Security and Medicare, and budget deficit and national debt. On the other hand, if his policies fizzle, with no other credible alternative in sight, the country could be in a real fix for a long time.

The Obama bull market is here!

2009-03-28T12:14:00.014-04:00

Posted by Shyam Moondra

The stock market has gone up over 20% since it hit the bottom in early March. As a rule of thumb, that's considered the beginning of a bull market and not a bear-market rally as some analysts suggest. While 20% gain in less than a month may seem excessive, this up move should be viewed in conjunction with the excessive market decline of over 55% from the peak set in October of 2007. During most of 2008, the market behaved as if the sky was going to fall and we will have a repeat of the depression of the 1930's, which never materialized. In essence, during 2008, the market was besieged with fear and it simply overreacted.

It's hard to not stipulate a bullish scenario for the stocks in coming weeks and months, given the following government actions and market trends:

The monetary policy is the most expansive we have witnessed in decades. The money supply is growing at a rapid clip and interest rates are the lowest we have seen in recent history. The bountiful money will unquestionably expand the economy.
The Obama administration's aggressive policies on the fiscal front are also positive for the economy. The stimulus package and the proposed budget plan include lower taxes for the middle class and significant increases in government expenditures. These actions will create new jobs, revitalize the sagging construction industry, and increase consumer confidence. Because of the provisions in the stimulus package and the budget, we can expect a reduced rate of home foreclosures and increased rate of home buying, made possible by tax credits for home purchases, attractive home prices and the lowest mortgage rates ever (stimulating refinance market which puts more money in the pockets of homeowners). The latest monthly housing report showed an increase in the home sales for the first time in months, which confirms that we may have hit the bottom in the housing sector.
The credit market is stabilizing and we will see a continued improvement in that area in the coming weeks and months. The TARP, FED's credit-window facilities, and the proposed $1 trillion plan to remove the toxic assets from the books of the banks will steadily bring normalcy to the financial markets. The fear of systemic failure of the financial system, which sunk the markets by 55%, is behind us, and, therefore, it's natural for the market to recover a big chunk of that loss in the short-run. The recent signs of stabilization in the housing sector bodes well for these toxic mortgage-based securities to start appreciating in value and thus help speed up the process of normalization in the credit market.
Consumer confidence seems to be gaining, as is evident from the recent data on retail sales. The consumers are already seeing a slight increase in their paychecks, thanks to the stimulus package; more money in consumers' pocket will boost their confidence in coming months and they will start spending again.

President Obama deserves credit for providing strong leadership on all fronts; his plans are intellectually well thought out and he is attacking the problems through a multi-pronged approach that will bear the fruits sooner than many critics think. For the first time since the Clinton presidency, it is becoming clear that a smart and a strong leader can indeed make a big difference.

Of course, things are not going to go up in a straight line. We will have some hiccups along the way, but the die is cast and we are on our way to renewed prosperity again. The biggest issue in my mind is the rekindling of inflation. As the economy becomes stronger, we will see a spike in commodity prices. Easy money and sharply increased government expenditures will set the stage for inflationary spiral. Therefore, the next challenge for the FED will be to manage interest rates in a way so as to ensure continued economic expansion while keeping inflationary expectations in check. That means the interest rates will have to start going up gradually beginning in 2010. The Obama administration will also have to come up with a plan to address the bulging budget deficits and ballooning national debt. Decreasing government expenditures (e.g., eliminating waste and contracting abuses in the defense department) and increasing taxes on the super rich and closing down corporate tax loopholes (when companies like Goldman Sachs that use their offshore subsidiaries in tax-haven territories to escape taxes and pay only 10% in taxes, they unfairly put the tax burden on the American people).

I believe the stock market is slated to recover at least half of the losses incurred in 2008 rather quickly, which will bring the Dow Jones Industrial Average to around 10,000 by the end of this year. Further gains in 2010 and beyond will depend on how skillfully the FED manages the interest rates and money supply and how successful President Obama is in bringing down the budget deficit. By the end of President Obama's second term, it's not inconceivable to see Dow Jones Industrial Average of 18,000.

For the rest of the year, there are plenty of attractive investment opportunities. The technology sector has been lagging and thus could do well in the coming months (HP, GOOG, AMZN, AAPL, RIMM, BIDU, IBM, MSFT, CSCO, etc.). The financial sector has been beaten down sharply, so it will recover just as fast (JPM, WFC, BAC, C, etc.). Some of the other industrial companies that look very attractive are MON, CAT, CMI, FDX, UPS, AA, CE, DOW, BA, HON, GE, MMM, VFC, TJX, etc. (Disclosure: The blogger owns most of these stocks).

New political math: Obama = 1/Reagan

2009-03-16T05:05:00.020-04:00

Posted by Shyam Moondra

The 1980's defied the classical Phillips Curve of the economic theory (inverse relationship between the rate of unemployment and the rate of inflation) and had both high inflation and high unemployment. In 1980, when Ronald Reagan was elected as the president of the United States, he formulated his economic policy based on his conservative philosophy of smaller government and lower taxes or what came to be known as supply-side economics or trickle-down economics (or as his opponent in Republican primary election, George H. W. Bush, called as the "voo-doo" economics). The idea was that people could keep more of what they earned which would induce them to work harder, and that would, in turn, lead to more saving and investment, stimulating overall economic growth. While the Reagan tax cuts benefited mainly wealthier Americans, the economic theory behind the aggressive tax cuts argued that benefits would trickle down to lower-income people as well because higher investment would lead to new job opportunities and higher wages. At the same time, Reagan feared that the U. S. had neglected its military in the wake of the Vietnam War, so he pushed for big increases in defense spending. The tax cuts and increased defense spending made a big hole in the budget. Reagan mistakenly believed that huge budget deficit and sharply increased national debt will force Congress to cut non-military spending, but in a Democrat-controlled Congress that part of Reagan's economic plan never materialized and Reagan's legacy included huge budget deficit and huge national debt. It took President Bill Clinton, a Democrat, two presidential terms to balance the budget by increasing taxes on wealthy Americans, reducing growth in defense spending, and modernizing welfare programs.

Now, President Barack Obama, a Democrat, is faced with the worst economic crisis of the century with declining economic growth, increasing joblessness, and falling prices. However, Obama is relying on increased government spending and lower taxes for the middle-class, in the belief that massive new government spending will instantly create new jobs and lower taxes will induce middle-class consumers to spend more, thereby giving a big boost to the sagging economy. This trickle-up approach, which is exactly the inverse of Reagan's trickle-down approach, will bring a modest gain for low-income and middle-class people who lost considerable ground during the presidency of George W. Bush (2001-2008). However, this massive government spending and reduced tax revenues will make a bigger hole in the budget and the big Bush deficit and debt will become even more big. The Obama's calculation is that huge deficit and debt will force Democrat-controlled Congress to increase taxes on wealthy Americans and cut defense spending. Of course, Republican Reagan stood no chance of getting his proposed non-military spending cuts approved by Democrat-controlled Congress but Democrat Obama has a pretty good chance of getting his proposed tax increases on the rich passed by Democratic Congress.

So what we have is an inverse of Reagan economic policy, i.e., Obama = 1/Reagan. One could also argue that Obama is trying to accomplish what Reagan and Clinton did together, the former left a big budget deficit and Clinton turned that into a surplus by increasing taxes on the richest.

The million-dollar question that still remains to be answered is would the Obama plan lead to trickle-up prosperity or it will stifle economic growth and lead to trickle-down misery. Hopefully, the present economic crisis will provide a definitive answer to that question.

Some comments on the U.S. foreign policy

2009-03-14T11:03:00.020-04:00

Posted by Shyam Moondra

Swiss Bank Laws:
I think the U.S. government should insist on more comprehensive changes to Swiss banking laws than what has been offered by Switzerland. Switzerland's bank secrecy laws have encouraged drug traffickers, money launderers, wealthy tax cheaters, and corrupt politicians to stash away large sums of money in Swiss bank accounts. In many of the developing countries, for example in Africa, Asia, and South America, politicians are known to have stolen public funds and financial aid money and deposited in secret Swiss bank accounts. Switzerland is thus aiding and conspiring with these corrupt and criminal people around the world to steal public money that should have been used to fight poverty and hunger in many of these impoverished countries. It has been widely reported that former and current Pakistani leaders and military officers and Palestinian leaders have stolen funds from the U.S. aid money and deposited in secret Swiss bank accounts. Even people like Vladimir Putin are rumored to have secret bank accounts in Switzerland. I think the U.S. and other industrialized nations should insist on dismantling the Swiss secrecy laws and put a stop to the breeding corruption worldwide. If Switzerland does not cooperate, the U.S. must threaten to shut down the operations of the Swiss banks in the U.S. and pass laws to make it difficult for Swiss banks to do business anywhere in the world.

Policy towards Pakistan:
The key to defeating Al Quaeda and Taliban lies in our policy towards Pakistan. Pakistan has been a half-hearted partner in this matter. They have used terrorism as a policy tool against India while pretending to be helpful to us in the fight against terror so that they could collect billions of dollars of our aid money. They have been playing a shrewd game of collecting the aid but doing as little as possible. The result is that the terrorists have only become stronger. I think we need a major shift in our policy towards Pakistan. We should announce a complete cessation of all financial and military aid to Pakistan. Then we should lay out measurable benchmarks that they will have to meet before we restart aid in incremental manner. The benchmarks would be: they must dismantle terrorist camps and infrastructure within their territory, they must close-down their religious schools that are a breeding place for terrorists-to-be, they must pass banking laws to trace the money and stop channels (e.g., drug trafficking) that feed money to terrorists, and they must ban terrorist organizations and prosecute the known terrorists as demanded by India. We should also insist that they put their intelligence agency ISI under the firm control of the civilian government and direct their military resources towards fighting terrorism in the Northern provinces rather than position them against India. We should continue to attack potential terrorists on Pakistani soil even without the permission of the Pakistani government; self-defense against cross-border attacks by terrorists on NATO forces in Afghanistan provides a valid legal basis for doing that. Also, we need to have a secret strategic plan to seize their nuclear arsenals and destroy their WMD labs and infrastructure, if Pakistan's domestic situation deteriorates to the point that we face the danger of these WMDs falling in the wrong hands.

Policy towards Russia:
From the day Barack Obama was elected as the president, Russia has been shrewdly playing tough and behaving aggressively as a follow-on to their invasion of the tiny neighbor Georgia. Now they are even talking about placing Russian bombers on Cuban soil. Even in the face of this bluster, the reality is that with the crashing oil prices Russia is actually on the defensive and they are craving for Obama's attention. Therefore, I don't think we should make any unnecessary concessions. We should hang tough on our missile shield plan unless they make concessions on Iran and else where. We should insist on more democracy and freedom of press in Russia before we shoot for close relations with them. The Russian leaders are not trust-worthy - Prime Minister Putin is a typical cold-warrior in the KGB mode. I think President Obama should put Russia on the back-burner for now and not make any hasty decisions simply because they are testing the novice Obama by all this tough talk of placing bombers in Cuba or directing ballistic nuclear missiles towards Europe. We should, however, negotiate a new arms-control treaty with Russia, if it is in our self-interest.

Policy towards Cuba:
We need to reassess our relations with Cuba, which is no longer a Soviet puppet or threat to us. Carrying on a cold war era policy towards one of our smallest and poorest neighbors is laughable. We need to tone down our harsh policy towards Cuba and help them with their economic development. A stable and prosperous Cuba is in our interest. We should encourage people-to-people contacts and allow travel and business deals between the two countries. Over time, they will have more democracy (we started our relations with China on that basis in the 1970's, so why not treat Cuba the same way?).

Policy towards Israel:
Israel's continuing expansion of settlements in occupied territories is illegal and a big obstacle in achieving comprehensive peace in the Middle-East. Just like with Pakistan, we need to set some benchmarks for Israel to meet for us to continue our financial and military aid to them. It's a tough decision but a necessary and fair decision to achieve lasting peace in that region. Israel must go back to pre-1987 war borders and give up all of the territories they seized in that war, with some minor adjustments to provide contiguous borders, and in return, all of Israel's neighbors must recognize Israel and establish diplomatic relations with Israel. I don't think Israel will see a need to make any concessions to achieve real peace unless they have something big to lose and that big thing is the close relations with us and our financial aid to them. In Israel's calculation, if they can maintain status-quo for another fifty years and yet keep getting billions of dollars of the U.S. aid every year, it's the best outcome for them. I don't think there will be lasting peace in the Middle-East unless there is some fundamental change in our policy towards Israel to induce them to long for peace.

Stock and commodity markets are manipulated - we need regulatory reforms

2009-03-08T15:02:00.012-04:00

Posted by Shyam Moondra

It's a well-known fact that increased volatility in stock and commodity markets is primarily due to manipulation by investment banks and hedge funds through their frantic computerized trading. Jim Cramer, a TV business commentator, once posted a video on his website explaining how he, as a former hedge fund manager, used to throw $25 millions or so and move a particular stock up or down as he wished. The investment banks and hedge funds short sell a stock to push it down (often spread false rumors about the targeted company to aid the process of bringing it down) while also trading in options. Then just before the monthly options are to expire, they start covering their short positions and push the stock up. In the process, they may lose some money in trading stocks but they make proportionately more money in options and thus come out ahead. Sometimes they move a particular stock up or down to make the options they wrote worthless and thus pocket the premium the buyers paid. They repeat the process every month in many targeted stocks and make money at the expense of small investors. Some of these big players also use what is known as "pump-and-dump" strategy in which they take substantial long position in a company, usually a lesser-known small-cap company, and then publish inflated views or research reports about those companies that help move the stock price up ("pumping"), enabling them to sell their holding at a profit ("dumping"). Some times these big players also use their research departments to make money in their trades. As an example, Goldman Sachs' research department was touting that oil was headed to $200 per barrel while at the same time they reportedly held long positions in oil. It's also reported that some investment banks were selling mortgage-based securities to others while at the same time they were short selling those securities.

The stock markets were created to help companies raise capital so that they could build new factories and hire more workers and the stock prices moved based on the companies' fundamentals. Now the markets move up and down in a yo-yo fashion without any underlying change in fundamentals. The increased volatility caused by manipulation in the markets has turned the markets into gambling casinos, hurting our overall economic system.

We urgently need new regulations to stop market manipulation by the investment banks and hedge funds. The government could take a number of actions such as:

Ban naked short selling, limit short positions to 1% of outstanding shares at any given point in time and reinstate the "up tick" rule for short selling.
Regulate hedge funds like any other mutual fund. Their CEOs and other officers must pay taxes at the regular rates as opposed to at the capital gains rate as they do now.
Investment banks and hedge funds must be required to hold stocks they buy for a certain specified period before they can sell those stocks.
Change the margin rules so investment banks and hedge funds are limited to leverage of no more than 10:1 (in the recent past they have had leverages of up to 40:1).
The investment banks must not be allowed to own research business. Currently, they have arm's length relationship between their trading and research departments which is not enough.
Pass tough laws to discourage "pumping-and-dumping" so that big players can't make money at the expense of unsuspecting small investors.
Strengthen SEC resources to investigate and enforce the laws vigorously to stop market manipulation. The CEOs of the companies that are found to violate any of the new regulations must be given mandatory jail terms and their companies must be fined heavily to discourage them from manipulating the markets.
Change the tax laws to stop investment banks and hedge funds from escaping from paying their fair share of income taxes. In a recent quarter, Goldman Sachs paid only 10% in taxes because they executed their trades through a complex web of off-shore subsidiaries and hedge funds that made it possible for them to reduce their tax levies. It's time we close all these tax loopholes.

Economic recovery may be erratic but it's on right track

2009-03-07T17:16:00.012-05:00

Posted by Shyam Moondra

President Barack Obama has been in the oval office for only a few weeks but he has moved at a lightning speed on several fronts simultaneously. While his actions may not be perfect, he seems to have a good intellectual grasp of how the various pieces of the puzzle fit together. Undoubtedly, some critics on the other side of the political divide would say that he is on a wrong track. However, given the awful results of the George Bush presidency, it's hard to support the Republican ideological viewpoint that doing anything differently from what President George Bush did automatically puts you on a wrong track.

Never before, economic fortunes crumbled worldwide in such a short period. Low interest rates of the 1990s fueled the housing market prompted by innovative products such as sub-prime mortgages, mortgage-based securities, and credit default-swaps. The business was so lucrative that financial institutions around the world jumped on the bandwagon without ever bothering to fully assess the enormous risks involved and made a fortune. But when the FED started increasing interest rates to tame the fears of inflation, the house of cards began to crumble. Reduced demand for housing led to rapid decline in home prices that, in turn, led to the floodgate of defaults and foreclosures. The financial institutions that grabbed the mortgage-securities began to see the values of those securities evaporate and they were forced to report huge losses bringing them closure to bankruptcy.

The Obama administration moved swiftly to address the issues in a top-down as well as bottom-up fashion (as I suggested in "Combine top-down and bottom-up approaches to deal with the credit crunch," The Moondra Post, September 30, 2008) by offering assistance to the financial institutions through TARP and FED credit facilities as well as providing help to the homeowners to stay in their homes. The stimulus package, recently passed by Congress, includes tax credits for home buyers that should help reinvigorate the housing market. The Obama's proposed budget includes income-tax reductions for 95% of the taxpayers that will induce them to spend more, thereby boosting the economy. The budget also includes massive spending for infrastructure projects that would instantly create new construction jobs. In addition, the proposed budget includes long-term investments in alternative energy technologies (that will create new high-paying jobs and reduce our dependence on imported oil), health care (that will reduce health care costs), and education (that will increase our competitiveness in the world), The Obama administration's multi-pronged approach to the economic collapse is well thought out and it will yield positive results over time. While it's true that the budget proposal has many pork-barrel wasteful spending appropriations, overall, it has many more positive elements that are necessary under the present dire circumstances.

Not to forget the last piece of the puzzle, the regulatory reforms. Lack of regulations and oversight led to the collapse of the financial system. So it's not surprising that the Obama administration is aggressively moving to bring the regulatory regime to the twenty-first century. We need to regulate investment banks and hedge funds, monitor and regulate computerized trading to eliminate market manipulation (ban naked short selling, limit short selling to 1% of outstanding shares, require institutions to hold stocks they buy for a certain minimum period before they can sell those stocks, and limit trading in derivatives such as options), and impose strict capital requirements on all financial institutions (no more 40:1 leverage used by many investment banks and hedge funds).

The increased spending to jump-start the economy will certainly add to our budget deficit and national debt in the near-term. That's why President Obama is already looking beyond the near-term and he has proposed to reduce government expenditures (e.g., changes in defense contract procedures and health care reforms will save billions of dollars) and increase taxes on the richest (who prospered handsomely during the Bush years and now must give up some of those gains). It took President Bush eight years to turn a budget surplus into a huge deficit, so it's reasonable to expect that it will take a concerted effort by the Obama administration over the next several years before we see a budget surplus again.

In spite of the above dramatic initiatives, we are continuing to see unemployment on the rise and corporate profits on the decline, but the actions taken by the governments around the world create just the right conditions for an economic recovery. Lower interest rates, increased government expenditures, lower taxes for the middle-class, and regulatory reforms will boost the global economy soon. These conditions are ideal for the financial markets, so President Obama was right in his recent observation that long-term investors should start buying dirt-cheap stocks. The current average PE ratio of S&P 500 index of 12, while not as low as 6 of July 1932 and 7 of July 1982, is much lower than the latest 25-year average of 21 and 50-year average of 18. The decline in the average PE ratio from the recent peak of 44 set in 2002 is the worst since the depression of the 1930's. The conditions today are, however, very different than those in the 1980's when we had double-digit inflation and double-digit interest rates. Today, we have annual inflation rate of about 2% and fed funds rate of 0.5%. Therefore, the stocks are indeed very cheap with a huge upside potential.

Aside from the differences in policy directions, there is a stark difference in mostly reactive mode of operation of the Bush Administration and a pro-active comprehensive approach of the Obama administration. President Bush had no long-term vision and he never believed in a deep governmental involvement in free-market economy. President Obama works off a well-thought out strategic vision bringing in the full weight of the government to make his initiatives yield the results quickly. If President Obama continues to show vigor and remains a hands-on chief executive as he has been so far, chances are we will begin to see the results of his stimulus package and the proposed budget plan as early as in the second-half of 2009 and by 2010 we should be well on our way to recovery and renewed prosperity.

How to reign in executive compensation at publicly held companies?

2009-02-02T06:42:00.013-05:00

Posted by Shyam Moondra

Recently, President Obama used strong words to describe the run-away executive bonuses, calling them "shameful" and "irresponsible." That's a pretty good start and it shows that Obama means business. In the last ten years, executives have been looting shareholders' money and they have become a new immoral super-rich class aided by the corrupt Board of Directors who themselves are retired or active CEOs of other companies. The annual compensation of the Board of Directors has also increased significantly, nodded by the CEOs, and, in return, the Directors have granted obscene levels of compensation and perks to the CEOs. This has become an old boys' network based on the philosophy of "you scratch my back and I scratch yours." The astronomical gains made by this exclusive club often came at the expense of lower level employees who actually lost ground in recent years. It has been reported that ten years ago the CEOs used to make roughly 40 times of what the lowest paid employees made but today that number exceeds 450. The CEOs justify their outsized compensation based on job complexities caused by globalization; however, President Obama, who has the most difficult and most stressful job in the whole world, makes only $400,000.

Obama has spoken out against this institutionalized corruption very strongly, which should now be backed-up by concrete steps to bring down executive compensation to a more reasonable level. There is a lot the president, state governors, and Congress can do to make that happen. Below are some ideas:

Pass a law to make it illegal for any publicly held company to pay its CEO more than a $1 million dollars a year which include cash, stock options, and perks. Obama has proposed to limit the cash compensation to $500,000 but allow unlimited stock options for only those companies that received extensive help under the TARP program (e.g., Citigroup, AIG, and General Motors). This selective limit is unworkable because the CEOs of the affected companies will resign and join other companies that are not subject to this proposed cap. The exodus of the talent will weaken the TARP companies, making it much harder for them to recover. If Obama is serious about reversing the trend of excessive executive compensation, the proposed cap would have to be applied universally to all publicly held companies.
If the above law can't be passed because of the opposition of the Republicans, then the federal and state governments should pass regulations denying government contracts to publicly held companies that pay more than $1 million to their CEOs and black-list those companies and their CEOs on the government websites.
Obama could use his grass-root campaign (he has millions of e-mail addresses that his campaign collected) to encourage the population to boycott the products made by the companies that pay their executives excessively.
Pass a legislation that will impose a tax surcharge on companies that pay their CEOs more than a pre-specified limit; this surcharge will be calculated based on how much more the CEO is paid in excess of the limit. Also, the excessive compensation could be made non-deductible for tax purposes.
The president and the Congressional leaders should publicly speak out against the companies that violate the compensation limit and name them and their CEOs in their statements to keep up the pressure. By shaming them publicly, the government will force these companies to fall in line.
Pass regulations to increase the cost of financial transactions for the violators, by issuing banking regulations that will make it harder for these companies to do business.
Pass corporate governance rules that will permit shareholders to vote on executive compensation packages granted by the Board of Directors.

Obama should rethink the stimulus package

2009-01-31T10:55:00.013-05:00

Posted by Shyam Moondra

The government has terribly failed the American people. First, former Treasury Secretary Henry Paulson and FED Chairman Ben Bernanke were saying that sub-prime mortgages were not a problem. Then they wanted the bailout money to buy these so called toxic mortgage-based securities from banks to strengthen their balance sheets. But once they got the bailout money, they changed their minds and ended up buying banks' preferred stocks instead. Now the new Treasury Secretary Geithner and Bernanke want more bailout money to buy those toxic securities they were supposed to buy in the first place. I bet even if they buy the current toxic securities, next quarter there will be more new toxic securities on the books of these banks and the FED/Treasury will ask for even more money to buy more of these securities. I don't think the government officials have really understood the problem or thought through what really needed to be done; they are just throwing money and trying different things thinking that something will work. Well, so far it's not working and tax-payers are out of $700 billion, adding to our already very high national debt.

Now comes this monster stimulus package (full of all kinds of pork barrel projects that candidate Obama said he will not allow) worth almost a trillion dollars that will guarantee that our federal debt will be so big that it will take at least ten years to bring it down to a more reasonable level and it will almost guarantee that we will have higher interest rates in the future. The mismanagement of our economy will ensure that American people will have to accept declining living standard for years to come.

Before we talk about the possible solutions, let us take a quick look at what brought us here:

Lack of leadership by President Bush and lack of oversight by Congress.
Incompetence of FED Chairman Bernanke and former Treasury Secretary Paulson.
Greed. Excessive compensation of the CEOs and market manipulation by hedge funds and investment banks.
Lack of regulations that led to these toxic mortgage-based securities and credit-default swaps.
Lack of enforcement by the SEC under Chairman Cox.

Now this is what we need to do:

Have new leaders in Congress and replace Bernanke immediately.
Reform regulations. Regulate hedge funds (they must pay their fair share of taxes and report their trading activities), pass stronger laws to prevent stock/commodity market manipulation by big players (revisit short selling/option trading rules, reduce computerized trading by imposing a simple rule that hedge funds/investment banks must hold a stock they buy for at least five business days before they can sell that stock), and monitor risky financial products offered by financial institutions more closely.
Impose strict limits on executive compensations for all publicly held companies, small or big and whether or not they receive federal bailout money. The whole system has become corrupt where the Board of Directors (comprised mainly of other active/retired CEOs) grant outlandish compensation packages (cash, stock, perks). No one, even if she/he works 24 hours a day, deserves to make so much money; it's nothing short of looting of shareholders money by a handful of bandits who have become super rich. Why should these CEOs get to make so much more than President Obama, who has the toughest and the most stressful job in the whole world?
Change tax laws as they apply to businesses. When Goldman Sachs, using its web of foreign subsidiaries, pays only 10% in taxes, it's so unfair to the rest of the tax-payers. We need to close these tax loop holes and eliminate tax-exempt status of some of the territories.
Suspend TARP - it will never solve the bank solvency problem. The banks made so many mistakes (and they still continue to make mistakes, e,g., buying corporate jets and remodeling their offices) that the government will need several trillion dollars to clean-up their balance sheets. The best thing to do now is to let the bad apples fall from the tree. An overwhelming majority of the American people think that the TARP is a huge mistake and it is an unnecessary wasteful spending of taxpayers' money. Nationalization of banks is not a solution - it will create more failed enterprises such as Amtrak and United States Postal Service.
Aggressively and vigorously enforce the laws and protect the shareholders. Strengthen the SEC and mandate them to prosecute the wrongdoers mercilessly. Can you imagine what will be the crime rate on the Main Street if the police was not cruising the street? Believe or not, there are more crooks on the Wall Street than on the Main Street. We need to have an environment where these white-collar crooks think twice before they commit any fraud.
Solve the fundamental problem of housing which precipitated the economic meltdown in the first place. Find ways to freeze foreclosures and stabilize the housing market (may be the government should buy the houses overhanging the market, as was done during the 1930's depression). Force the lenders to lower the mortgage rates to 4.5% immediately. Come up with a plan which will reduce forced selling of houses and at the same time provide incentives to the people to buy houses, which will, in turn, help stabilize the housing prices. Once the housing prices start to increase again, everything else will fall in place (mortgage securities will become more attractive and it will become easier for banks to sell those securities).
We need a stimulus package but not the one passed by the House, which has a lot of wasteful pork barrel spending that Obama said he will stop. The package should include the following elements: Reduce taxes for the middle-class and increase taxes for the super-rich who make more than $500,000 a year; provide a safety net for those who need immediate help such as extended unemployment benefits, help with COBRA heath insurance premiums, and help to elderly people who live on fixed income; infrastructure spending (satisfies an urgent need to repair crumbling roads and bridges and also creates jobs), education spending targeted to improve our students' performance and make college education more affordable (that means better equipping labs etc. but not re-building our school structures; anything that has only a marginal value in improving students' scores is wasteful spending; also need new tax laws to force schools with huge endowments to roll back their tuition fees and increase student aid, or else the government should seize those endowment funds), set-up a program to help the housing industry, as explained above, and finally, spend on some long-term projects in the area of green technology, energy conservation/alternative energy sources, etc.

The stimulus package passed by the House has a lot of wasteful spending pushed by the liberal wing of the Democratic Party, which will hurt them in the next election. I support the efforts of some of the moderate Republican senators who are now trying to clean-up the bill just passed by the House.

Barack Obama, the 44th President of the United States of America

2009-01-19T10:13:00.022-05:00

Posted by Shyam Moondra on January 20, 2009

Today, 45 years after Martin Luther King, Jr. gave his "I Have a Dream" speech at the Lincoln Memorial in Washington, D.C., Barack Obama, an African American, was sworn in as the 44th President of the United States of America.

Obama's father was a Black Muslim from Kenya, although his white mother and maternal grand parents raised him as a devout Christian. It would seem unimaginable that a black man named Barack Hussein Obama could ever become the president of the United States.

It's no coincidence that Obama admires Abraham Lincoln the most and draws inspiration from him. It was Lincoln who ended slavery in the United States and was called by Frederick Douglass, one of the most prominent African Americans in the history of the United States, "emphatically the black man's president." It was no surprise that Obama chose to replicate Lincoln's train ride to Washington, D.C. for his inaugural.

Today's historic swearing-in by Obama, which was witnessed by over two million Americans, is clearly one of the defining moments in the history of the United States. While this was a matter of pride for all Americans, whites and non-whites alike, this monumental achievement has also demonstrated to the world what America is all about – a place where anyone can realize his or her dreams. The inauguration of the Obama presidency reflects the character and strength of America that even our adversaries envy. Obama's election has instantly resurrected the admiration, respect, and love that many people around the world have had for America.

Obama ran a brilliant and disciplined campaign; he was inspiring on the campaign trail; and he offered a message of hope in tumulus times. Obama's emphasis on inclusiveness and unity, sense of individual responsibility and purpose, and governmental transparency resonated well with the electorate. His calm and steady demeanor throughout the tough primary contest showed that he had what it takes to be a great president. His victory in the general election with an overwhelming majority demonstrated that the country was ready for a change.

Obama achieved so much and yet so much remains to be done. He now has to lead the country, in a non-partisan way, out of the current economic malaise. Never before, a new president inherited so much on his plate. Obama has to fix the economy and improve the lives of the middle class, bring the Iraq war to a conclusion, fight terrorism head-on in Afghanistan and Pakistan, solve the health care crisis, achieve energy independence, address the problem of global warming, settle once and for all the Israeli-Palestinian conflict, deal with belligerent Iran and North Korea and an overly aggressive Russia, improve the declining educational system, and tackle the entitlement programs. Obama has the intelligence, laser like focus, and energy to work on multiple issues and achieve big things for the entire world. He may very well nudge the U.S. Congress, that has in recent years become the weakest link in the government, towards becoming a more responsive and productive institution. If Obama and Congress can work together constructively and inclusively, Obama presidency may prove to be one of the greatest presidencies of our times.

The road ahead is full of obstacles but for now the spirit of America is up and we should celebrate and cherish this extraordinary milestone in our history.

An open letter to Pakistani President Asif Ali Zardari

2009-01-03T09:33:00.016-05:00

Posted by Shyam Moondra

I am appalled at how bad things have gotten between Pakistan and India. It's hard to believe that Pakistan and India used to be one country not long ago and now they are arch-enemies.

The state of affairs is very negative for both Pakistan and India, more so for Pakistan than India. In the era of intense global competition, Pakistan and India will fare much better if they stop this destructive animosity and mistrust.

I blame Pakistan more than India for the current stalled relations between the two countries.

Here is my synopsis of what is going on:

Pakistan erroneously believes that it's "equal" to India. India is a much bigger country and is a major emerging economic power. Also, India is a full-functioning democracy, while Pakistan's history on that front is weak. So this concept of "equality" is misplaced.
India has made good economic progress in recent years, thanks to the reforms that were started during the Rajiv Gandhi administration. I suspect Pakistan is jealous of that and it tries to pull India down through terrorism.
Pakistan started using terrorism as a policy tool against India through its out-of-control ISI. Initially, the focus of this campaign was Kashmir, but in recent years terrorism is being extended to targets in India (e.g., last month's attacks in Mumbai, attack on India's Parliament building, and previous Mumbai attacks) and elsewhere (e.g., Indian embassy in Kabul). These attacks are criminal because they target innocent civilians, which is contrary to the teachings of the Koran.
The support of ISI given to terrorist organizations has made them stronger. But once these terrorists found a foothold, they began to target Pakistan itself. These undesirable elements are trying to eat the hands that once fed them.

I think India has shown tremendous restraint and deserves credit for that. India understands that going to war is not going to solve this problem; wars have unpredictable outcomes and it will bring only misery, more to Pakistanis than to Indians. On the other hand, if Pakistan continues to use terrorists as a proxy to bring India down, then India is put in a position where it has no other choice but to attack Pakistan militarily.

Here is what I think Pakistan and India need to do:

First, Pakistan MUST stop ISI's support for terrorist organizations. Pakistan MUST handover the terror suspects of recent Mumbai attacks to India or MUST bring them to justice via Pakistani courts. Putting them under house arrest or arresting them but releasing them a few months later is a sham, not justice. They killed 180 innocent civilians, Pakistan must show better moral judgment than it has done so far. These terrorists must be hanged or jailed for life. If Pakistan doesn't take decisive actions this time, terrorism will destroy Pakistan itself.
Pakistan needs to reform its ISI and remove its bad elements. ISI must report to the civilian administration. The military must be put under firm civilian control as well, like in all other democracies. I think the American aid to Pakistan must be contingent upon these administrative reforms. A full-fledged democracy is a prerequisite for Pakistan to do well on the world scene, like India and Japan have done.
Pakistan needs to have governmental control of all of its territories, including the northern tribal provinces. If parts of Pakistan are not controlled by the central government, then, in strictest sense, Pakistan is not really a sovereign country.
Pakistan and India should stop treating each other as enemies. Stop hatred and animosity - all it does is bring destruction and block economic progress. Who knows, some day, Pakistan and India will become one country again (starting out as a federation, if not a fully integrated country - I think it's doable).
Kashmir has been a thorn between the two countries. I think the sensible thing to do is to agree upon the present Line of Control (LOC) as the final border (with some minor adjustments) and put this issue to the rest. I don't think any other solution will be accepted by the populations of the two countries (and leaders have to concede to the public opinion or else they will be thrown out of office by the voters). Pakistan and India may work out special provisions to have unrestricted access from one part of Kashmir to the other and allow free trade between the two parts.
The future of Pakistan and India lies in close relationship, increased trade, open borders, etc. It's that kind of relationship that will bring economic progress and improve the living standard for both populations. Terrorism will bring only misery - that's a dead end; all it will do is lock you in perpetual poverty.

In recent years, globalization has been the trend; we have more and more interdependence among the countries. Pakistan and India need to resolve their differences peacefully and reap the fruits of globalization - there is no other way.

I hope, you will see the wisdom in what I am saying and show strong leadership and statesmanship to do what needs to be done right now and in coming months and years to put the relations between Pakistan and India on the right track.

I might point out that your wife Benazir Bhutto and the late Indian Prime Minister Rajiv Gandhi saw the wisdom in good relations, and if they both were still alive today, it's safe to assume that Pakistan and India would have been like brothers again. Now it's up to you to realize their vision and improve the lives of your people.

Obama's leadership, sense of optimism, and competence will boost the stock markets

2009-01-01T12:24:00.022-05:00

Posted by Shyam Moondra

The person who occupies the White House has enormous impact on how the country, and for that matter the world, fares. Below is a synopsis of what has happened during the recent presidencies and what could one expect during the Obama administration.

Ronald Reagan (1981-1988): The Dow Jones Industrial Average increased from 900 to 2,500 or 178%. President Reagan believed in smaller government, strong defense, and lower taxes. He introduced trickle-down economics, i.e., prosperity of the rich people will trickle down to the poor (George H. Bush called it "voodo economics"). Reagan's strong and decisive leadership and inspiring communications skills led to optimism on the Main Street and Wall Street. However, lower taxes combined with increased defense spending led to large budget deficits.

George H. Bush (1989-1992): The Dow Jones Industrial Average increased from 2,500 to 3,200 or 28%. Bush is noted for his successful execution of Desert Storm war campaign that led to the expulsion of Iraqis from Kuwait. However, Bush tried to reduce the deficit caused by Reagan's policies by increasing taxes, breaking his pledge of "read my lips - no new taxes" and lost his re-election bid. The Reagan momentum carried into the Bush presidency and the stock market went up to a new high, but huge budget deficit remained a big drag on Bush's presidency. Bush also suffered from his lack luster communications skills.

Bill Clinton (1993-2000): The Dow Jones Industrial Average increased from 3,200 to 11,000, or whopping 244%. Clinton brought more centrist style government. His practicality, competence, superior intellectual abilities, uncommon political skills, and superb communications skills enabled him to grow economy, strengthen national defense, turn budget deficit into budget surplus, and entice people to move off the welfare rolls and become productive working members of their communities. Clinton demonstrated what a pragmatic and non-ideology driven government can accomplish. Clinton shied away from rash decisions on using the military power. His more cautionary approach in foreign affairs enabled the U.S. to achieve its goals in Kosovo without overextending the military while keeping our alliances strong. Even though Clinton's second term was marred by the Monica Lewinsky affair, overall he showed that a smart government can make a big difference in people's lives.

George W. Bush (2001-2008): The Dow Jones Industrial Average declined from 11,000 to 8,800 or 20%. The Bush years were the most incompetent, incoherent, visionless, and destructive years in the history of the United States. He led a government based on ideology and stubbornness (even if he made a mistake, he would refuse to change the course). His administration represents one of the most corrupt administrations in our history - he appointed incompetent and unqualified people in important government positions as political payoffs that led to disastrous results as was evident from how badly his administration handled the Katrina disaster. The award of no-bid contracts and missing billions of dollars in Iraq show how pervasive was corruption in his administration. His overemphasis on deregulation and lack of enforcement by the SEC led to a complete breakdown of our economic system. He spent money like a drunken gambler and turned the biggest budget surplus into the largest budget deficit. He hurriedly pumped hundreds of billions of tax payers' money into the financial system, only to be misused by the corrupt financial institutions. Bush misled the country by using manufactured intelligence to justify the invasion of Iraq that turned out to be a major blunder. He sacrificed thousands of American lives (many more wounded and now forced to live limbless lives) and hundreds of thousands of Iraqi lives, and he wasted $800 billions that could have been used right here to do good things for the American people. All of that was to get rid of Saddam Hussein, who, as Bush explained, "tried to kill my dad." This unnecessary war brought Al Qaeda to Iraq (and thus made us less secured) and fractured our alliances. Bush will go in the history as the worst president we ever had.

Barack Obama (2009-2016?): The Dow Jones Industrial Average is expected to grow from 8,800 to 18,000, or 105%. Obama is already showing many of the presidential characteristics that will help restore confidence in the country's future and our prestige around the world. Obama's inspiring written and oral communications skills (often compared to those of Lincoln, Kennedy and Reagan), his intellectual capacity and competence (often compared to those of Kennedy and Clinton), his emphasis on making life better for the low- and middle-class Americans (often compared to those of Roosevelt, Lincoln and Clinton), and his ability to think big (often compared to Lincoln who abolished slavery and Kennedy who called upon NASA to land a man on the moon). Obama, being a young man from the generation of Blackberry, e-mails, and YouTube, brings something new that is unprecedented - his strong belief in using technology to solve many of our problems. His focus on using green technologies to create new high-paying jobs and achieve energy independence, aggressively pursuing stem cell research to find cures for many diseases, and making extensive use of IT technologies to reduce the health care cost will help our economy start growing again. Obama represents a composite view of many of the desirable presidential characteristics, as exhibited by many of our past great presidents, that bode well for the future of our country.